Mortgage borrowing rules have been eased after the Bank of England scrapped an affordability test.
The “stress test” as it was called, was designed to assess whether potential borrowers could handle repayments if interest rates climbed by up to 3%.
Removing this test may make it easier for some people to get a mortgage, primarily the self-employed or freelancers. However, for the majority, the difficulty of obtaining a mortgage has not changed, with strict loan to income limits being kept in place.
The removal of the test was announced back in June, but only came into effect this week.
Mark Harris, chief executive of the mortgage broker SPF Private Clients said:
“The loan-to-income framework remains so there will still be some restrictions in place; it is not turning into a free-for-all on the lending front.
“Lenders will also still use some form of testing but to their own choosing according to their risk appetite.”
This means that there should not be any immediate impact for borrowers as lenders do not need to change the way they assess loans.
Despite the removal of this test, there are still strict checks in place to make sure that borrowers don’t take on loans they may not be able to afford, and to ensure there are no repeats of 2008 mis-selling scandal that played a part in the financial crisis.
The main check is the loan-to-income limit which makes it very rare for lenders to consinder offering mortgages that are greater than 4.5 times someone’s income.
The effectiveness of this check was supported by a 2021 review of the rules with the Bank of England’s Financial Policy Committee judging that “the LTI flow limit is likely to play a stronger role than the affordability test in guarding against an increase in aggregate household indebtedness and the number of highly indebted households in a scenario of rapidly rising house prices”.
This means that overall, this test being scrapped is probably not as significant as it sounds, as the Loan-to-Income limitation and borrowers ability to get a suitable deposit remain the biggest barriers to getting a mortgage.