Mortgage lenders can no longer have to check whether homeowners can afford mortgage payments at higher interest rates after the Bank of England has ditched the rule originally designed to avoid another 2007 style credit crunch. The rule was originally introduced in 2014 and it was intended to make sure that the borrowers did not take on more debt than they could afford, and potentially “amplify” an economic downturn and put financial stability at risk.
The decision to withdraw the affordability test comes despite the Bank of England having raised interest rates for the fifth time in a row as parts of its efforts to tackle soaring inflation, meaning some mortgage borrowers could be in line for higher repayments. The Bank of England which originally consulted on the changes in February 2022, confirmed it would scrap the affordability test after determined that other rules, including those that cap mortgages based on the income of borrowers, were “likely to play a stronger role” in guarding against an increase in household debt.
The central bank said in a statement that those other rules “ought to deliver the appropriate level of resilience to the UK financial system, but in a simpler, more predictable and more proportionate way”.
Experts said that while some might find the rule changes “baffling” in light of rising interest rates, the risks were relatively low, given the loan-to-income rules would remain in place.
Chris Sykes at the mortgage broker Private Finance added that the change would be positive news for borrowers who may be falling short on other affordability tests put in place by lenders who were taking the cost of living crisis into consideration. “This isn’t a case of the floodgates opening; in fact, whether the changed measures will even give flexibility close to that we saw when rates were 1% is a good question,” he said.
“Just because the recommendations change it doesn’t mean that banks will automatically change the way they look at things; they still have a duty of care, have to be seen to be lending reasonably and also have their own internal risks committees that they would need to get changes by.” “What this allow is for additional discretions or innovations by lenders. Perhaps it could inspire some lower stress rates for those that need it most with low income but with perfect credit and years of experience paying their rent.”