Since 2014 lenders have been required to apply a test on potential borrowers to find out if they could afford a mortgage repayment were the interest rate to increase by up to 3%.
The idea behind this assessment was to make sure borrowers would not fall into arrears if interest rates went up.
However, the Bank of England has today withdrawn the requirement for lenders to use this test when assessing applicants.
It sounds like good news – after all, it means affordability testing for new buyers will now be less stringent.
However, experts point out potential borrowers will still be assessed based on a second test, which has not been scrapped and focuses on income.
Indeed the loan-to-income (LTI) test means borrowers’ earnings must be at – or greater than – 4.5 times their income.
As this will remain, there is scepticism the scrapping of the 3% stress test will make much difference.
Stefan Boronea co-founder of neolender, Proportunity, said home ownership remained near impossible for first-time buyers who only had a small deposit.
“While removing the mortgage affordability test is a move in the right direction,” he said, “the loan-to-income limitations still make home ownership impossible for first-time buyers who are struggling due to the cost-of-living crisis and a spiralling increase in rent.
“With mortgage rates looking like they will continue to rise – therefore straining affordability even further – many people are already looking at alternative ways to finance their purchases.
“However, these only represent a temporary patch on a much deeper wound that everyone seems to ignore. Much more needs to be done to make homes affordable to the next generation.”
Cost-of-living increases
Another concern for mortgage affordability is the rising cost of living – with bills soaring and wages failing to rise in line with inflation, the cost of repayments may be sailing out of reach for many.
Paul Johnson, head of mortgages at St. James’s Place, said: “It is unlikely to have a big impact on lenders affordability calculations with the increase in utility bills being factored in.
“A bigger impact would have been seen if the FCA had changed the LTI rule which limits the number of mortgages that can be extended to borrowers at LTI ratios at or greater than 4.5.”
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