Bank of England affordability test

ended 01. August 2022

A journalist at the Mail Online / Thisismoney is writing a quick piece on the Bank of England affordability test removal — and is looking for some comment on whether it is expected to help more people be able to buy, especially first-time buyers? Or if other issues, such as saving for a deposit, mean it won’t have much on an impact at all? Just a few lines will do. Deadline is ASAP!

12 responses from the Newspage community

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The affordability test removal is not likely to make any impact, as lenders already have stringent calculations that they use. The biggest concern is the ever-increasing cost of living that will reduce how much first-time buyers can borrow, as most lenders use ONS figures to work out disposable income. Low earners are being hit the most. How are these potential buyers meant to save for a deposit with less disposable income in their households due to the cost of living crisis? We need intervention and to look at new schemes such as zero-deposit or generational mortgages.
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The scrapping of the affordability test will not, I'm afraid, have a huge impact on the ability of purchasers, including first-time buyers, to be able to buy a new home. Yes, it is certainly a small step in the right direction, in terms of the removal of barriers to lend, but until the bigger issue is resolved, namely the restrictive loan to income multiple caps, then actually, the scrapping of these affordability tests does very little to help people wanting to buy, or be able to borrow more money to do so. It does, in theory, marginally widen the pool of people now eligible for a new mortgage, but certainly for first-time buyers at least, it still does not go anywhere near far enough to help those trying to buy their first home. With a lack of governmental schemes available for purchasers and the Help To Buy scheme due to come to an end early next year, first-time buyers will still be relying heavily on the bank of mum and dad, or some other profound means to help raise enough deposit get themselves onto the property ladder.
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The removal of the stress test will allow some lenders to be more innovative in how they stress affordability. However, maximum loan to income multiple rules will remain and so I don’t expect to see much change. The client who called me this morning wanting 7x income was most disappointed. I would also question why the rules are being relaxed at a time when we have increased rates and increased living costs: should borrowers really be encouraged to borrow more at this time?
The changes to the affordability test will make very little difference to most first-time buyers. It’s saving up the massive sum needed for a deposit that causes the bigger issue. That’s a product of the ridiculous level of house prices in relation to average income; the answer is not in allowing people to take on more debt, the answer is to build more homes.
Removing the stress test will not affect how much a first-time buyer can borrow. This decision's fanfare as though it would solve buyers' problems is misplaced because the LTI flow is still 4.5x, meaning lenders are capped at what they can loan a prospective buyer. Yes, some lenders exceed this, however, those cases are becoming fewer and far between. The only thing that will help buyers is building more affordable homes. It certainly won't be fixed by the Bank of England removing a rule that did little in the first place.
The maximum income multiples have not changed, which means the total amount of borrowing you can secure has not increased. However, the removal of the stress test means that more borrowers will be able to reach those maximum lending limits, especially people with higher levels of existing commitments and those on lower incomes.
The removal of stress testing will make zero difference for customers wanting to borrow more as the loan to income affordability still remains. This idea is just a smoke and mirrors of making it look like things are changing for the better. The only way this helps is it gives the banks free rein to increase variable rates further with future base rate rises without the worry it's impacting their ability to lend.
The loosening of the stress test rate is definitely good news for first-time buyers and homeowners alike. But it's the loan-to-income (LTI) ratio, usually a maximum of 4.5 times earnings, that's the biggest obstacle for self-employed borrowers. However, 5x-5.5x income is possible for high earners.
Although relaxation of the Bank of England stress test is great for headlines, it's pretty much business as usual for everyone else. The key metric is the loan-to-income (LTI) ratio which states that no more than 15% of a lender's new residential mortgages can have LTI ratios at or greater than 4.5x. Another key affordability metric used to assess mortgages is debt-to-income (DTI) which dictates that a borrower's total repayments towards loans and credit cannot be more that circa 45%, but in reality most lenders have tolerances lower than this. So whilst many are claiming affordability safeguards have now been removed, the truth is they haven't.
August 1st will not go down in history as the day that obtaining a mortgage became easier for first-time buyers. The removal of the affordability test will not reduce the huge deposit they have to save, improve the inflationary effect on their living costs or help to stop the erosion in the value of their savings. Becoming a first time buyer is becoming an impossible dream for anyone other than those with wealthy parents or parents willing to release and gift equity from their own home.
It is a good idea in essence but I think when you take a deeper look into this it is only an empty promise. Yes the BOE may be scrapping the affordability stress test where usually a lender has to ensure that mortgage payments are affordable if there is a 3% rate increase however as rates are increasing anyway and likely to increase by 3% it just keeps us in the same position we have always been in. So it does help to keep the mortgage market afloat and things now do not seem as gloomy as they had 1 month ago but to say this will make it easier for buyer especially first time buyer is almost laughable.
Early indications are that lenders are not in a hurry to waive affordability tests. Not only will it mean a major overhaul of their systems and processes, but they are also likely to adopt a 'wait and see' approach for any further guidance from the FCA, and to see how it might affect any competitor who decides to be brave and move first.