Mortgage Affordability Scrapped by Bank Of England

1st August 2022, marks the day many potential borrowers have been waiting for. After months of rumours, today sees the Bank of England remove stress test requirements it enforces upon lenders, when determining mortgage affordability.

Great news, right? - Well, maybe not as good as many had initially hoped.

Although the Bank of England has now removed mortgage stress test requirements, lenders are still confined to only being able to offer a certain ‘Loan to Income’ ratio. In other words, most lenders can still only offer between 4.5 and 5.5x your income (solely or joint).

In addition to this, Mortgage Lenders will still use a stress test of their own choosing. In other word, instead of the 3% additional stress, they may now choose 2-2.5%..

In other words there will not be an immediate impact for borrowers as lenders will not need to change the way they assess loans, if they choose to change at all.

Since the collapse in ‘08, lenders have been promoting responsible lending and tidying up their back-books, ensuring cleaner/safer lending. Following the Bank of England guidelines being introduced in 2014 as part of the Mortgage Market Review, why would lenders want to go back on this now when all it’s done is help generate safer business for the mortgage provider, and the end customer, you!

Summarising thoughts?
Although good for potential borrowers, the majority of people looking for a new mortgage (whether purchasing or remortgaging/refinancing), will still be limited by loan to income multiples. Until these are improved, anyone looking for a mortgage will first be limited by this factor in any affordability testing. Besides, increasing income multiples would only lead to larger mortgage lending, which is only likely to hike house prices further as demand will grow stronger and supply is likely to remain similar. With this in mind, maybe things aren’t as bad as they seem right now?

The second thought, and again, something that impacts potential mortgage borrowers more than any stress testing - deposit. It still remains clear across the country that many are still struggling to save enough for the deposits needed. For example, in London, the average starter flat is now £275,000 - £300,000. Even saving for a 5% deposit on something like this is circa £15,000 - however with many mortgage lenders requiring a minimum of 10% deposit on a Flat (if not more), you can quickly see how the struggles on this front are far greater than any mortgage stress test.

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