The Bank of England announced this morning that its Financial Policy Committee will withdraw its so-called mortgage accessibility test. “Following the recent review of the mortgage market, the Financial Policy Committee has confirmed that it will withdraw its recommendation for the accessibility test,” the BoE said in a statement. This will take effect on August 1, 2022.
Stress rate
The test, introduced in 2014, sets a stress rate for lenders when assessing the ability of prospective borrowers to repay a home loan. “The recommendations were introduced to avoid easing mortgage lending standards and a significant increase in household debt which could in turn exacerbate the economic downturn and increase the risks to financial stability,” the bank said in a statement. The FPC regularly reviews such recommendations. In its latest review, published in the December 2021 Financial Stability Report, the FPC considered that the LTI flow threshold is likely to play a stronger role than the affordable price test in protecting against rising total household debt and the number of over-indebted households. a scenario of rapidly rising house prices. “Therefore, the LTI flow limit without the accessibility test, but in parallel with the broader assessment of affordability required by the FCA MortgageConduct of Business (MCOB) lending rules, should provide the appropriate level of resilience to the financial system of the United Kingdom, but in a simpler way. “, more predictable and more proportionate way”, the bank stressed. read more
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When two mortgage recommendations were introduced eight years ago, it was to guard against a significant increase in household debt that could worsen any economic downturn. These were a Loan to Income (LTI) limit and the accessibility test, which sets a “pressure interest rate” that lenders must take into account when assessing a potential borrower’s ability to repay a mortgage over time. The LTI threshold, which will remain in force, limits the number of mortgages that can be extended to borrowers with LTI ratios of 4.5 or higher. According to Rightmove data released today, the average asking price across Britain is £ 368,614 – with June marking the fifth consecutive month that it has reached a record high. Gemma Harle, CEO of Quilter Financial Planning, said: “While this may be a bad time to announce, the change in accessibility rules may not be as significant as it sounds like the Lending Limit to Income (LTI). He will not retire, which has a much bigger impact on people’s ability to borrow. “Although changing the rules is one of the many attempts to help first-time shoppers step on the ladder, it can have the opposite effect.” Gemma Harl “One of the main levers behind the ‘generation rent’ is the fact that house prices have far outstripped wage increases. Due to the high prices of housing, first time buyers also need very large deposits and in the current financial environment this kind of money saving will be very difficult due to the increase in rents and the cost of living. “In addition, inflation will devour any other savings they have in cash. “Housing prices are becoming increasingly inaccessible to potential buyers and this change in accessibility rules could perpetuate unsustainable growth as it boosts demand in a market that is already suffering from limited stock.” read more
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The government recently announced an extension of the Right to Buy system in the UK and an independent review of access to mortgage financing for first-time buyers, with the aim of expanding access to low-cost, low-deposit financing, such as 5% mortgages. . . The Bank’s Financial Policy Committee (FPC) has ruled that the LTI flow limit is likely to play a stronger role than the affordability test to protect against rising total household debt and the number of over-indebted households in a rapidly rising scenario. housing. Therefore, the LTI threshold without the accessibility test, but in parallel with the broader assessment of affordability required by the Financial Conduct Authority (FCA) lending rules, should offer the appropriate level of resilience to the UK financial system, but in a simpler, more predictable and more proportionate way, the Bank said. The Bank added that the majority of consultation responses were supportive of the proposals. He said lenders do not need to make changes as a result, as current accessibility assessments should already comply with FCA lending rules. Evidence from previous recessions shows that in an economic downturn, over-indebted households are more likely to reduce their spending sharply, reinforcing the recession.
It is difficult to pay mortgages
Some potential borrowers may find it more difficult to afford a home equity loan anyway, as mortgage rates offered by lenders rise after a series of Bank of England key interest rate hikes. Financial intelligence website Moneyfacts.co.uk reported on Monday that the average floating rate mortgage rate (SVR) reached 4.91% in June, the highest level since February 2009. Mortgage borrowers can end up with an SVR when their original agreement expires. The average total two-year fixed rate mortgage is 3.25% – the highest since November 2014 – Moneyfacts reported. The overall average five-year fixed interest rate is at 3.37% and is the highest in Moneyfacts records since June 2015. The two-year average is 2.54% – the highest since September 2014. Moneyfacts averages take into account all deposit sizes. read more
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Eleanor Williams, a financial expert at Moneyfacts, said the 0.12 percentage point difference between average two- and five-year fixed interest rates is the smallest the site has seen since 2013. He continued: “Average interest rates for those with higher levels of stocks or deposits have seen some of the sharpest increases, which may come as a surprise as products at this end of the LTV (loan-to-value) range have traditionally lower prices, in in part because of the lower risk of default on providers. “
Answer from industry
Discussing the decision to withdraw the test, Lawrence Bowles, director of research at Savills, told City AM today that “from a market point of view, the abolition of existing extremity simulations could mitigate some of the effects of higher interest rates. “In theory, at least, there should be a little more capacity to raise house prices than it seems at the moment, which is quite limited in the main housing market.” That said, a fairly high percentage of recent buyers have worked around the ‘normal floating rate plus 3 per cent’ extreme simulation closing at fixed five-year interest rates, meaning it will maintain or open up additional lending capacity for only part of the market. Said Bowles. He stressed: “Lenders will continue to test applicants for extreme situations to reflect where they expect interest rates to be five years from the start of the loan, in accordance with the rules for the business conduct of mortgages.” “Improved growth capacity will also depend on how willing lenders are to push for multi-income lending under responsible lending rules and ceilings on those who can lend at high income-to-income ratios. It is unlikely that the gate of housing credit will open “. Bowles concluded: “It will allow lenders to be slightly more flexible, which would be a welcome relief for some prospective buyers struggling to meet current criteria due to significant price increases over the past two years – but saving on a deposit will remain the most important barrier to home ownership. “ read more
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