Financial Policy Committee consult on withdrawing mortgage affordability test  

The first recommendation was the loan to income (LTI) ‘flow limit’. This limits the number of mortgages that can be extended at LTI ratios at or greater than 4.5. 

The second recommendation was the ‘affordability test’, which allows mortgage lenders to see a stress interest rate when assessing prospective borrowers’ ability to repay. 

The FBC has regularly reviewed these recommendations. Its December 2021 Financial Stability Report saw the committee consider a scenario of rapidly rising house prices. Without any policy measures in place, financial stability risks would increase starkly. 

The FBC’s analysis found that both of its recommendations on their own would mitigate the increase in risks. However, the LTI flow limit is likely to play a more robust role in protecting against increased aggregate household indebtedness, and the amount of highly indebted households. 

The FBC further assessed that the LTI flow limit should deliver an appropriate level of resilience to the UK financial system without the affordability test recommendation.  

This would be in a simpler, more predictable and more proportionate way – if the wider assessment of affordability required by the FCA’s Mortgage Conduct of Business (MCOB) framework is adhered to. 
 
The committee consequently opted to maintain the LTI flow limit recommendation and to consult on the withdrawal of its affordability test recommendation. 

In the consultation, published on 28 February, the FBS is seeking the view of interested parties on its proposal to withdraw the affordability test.  

The FBC particularly seeks to discover the impact of the affordability test on the mortgage market, how the mortgage market would respond if the recommendation was withdrawn and the holistic effect upon the housing market, as well as segments of the housing market. 

The consultation will close on 6 May 2022 after which the responses will be considered by the FPC. In the event of deciding to withdraw its affordability test, the FPC would expect to formally withdraw the affordability test recommendation within 12 months of making the decision.