FPC of Bank of England will remove mortgage affordability test

• Bank of England’s Financial Policy Committee will retract its proposal on the mortgage affordability test.
• The measure provides a “small” additional insurance, according to the BoE. A second recommendation. The loan-to-income “flow limit,” would not be rescinded.

The Bank of England Financial Policy Committee will retract its proposal on the mortgage affordability test because the measure provides a “small” additional insurance.

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Introduced in 2014, the test sets a stress interest rate for lenders to consider when evaluating the ability of prospective borrowers to repay a mortgage.

However, following a study of the market, the BoE announced on Monday that the suggestion for the mortgage affordability test will be dropped beginning in August.

It was also stated that the second recommendation, the loan-to-income (LTI) “flow limit,” would not be rescinded. This restricts the number of mortgages that can be granted to borrowers with LTI ratios of 4.5 or above.

When examining the effect of each individual recommendation, the Bank of England observed that the FPC’s study indicates that the LTI flow limit is likely to play a larger role than the affordability test in preventing an increase in the number of highly indebted families when house prices rise significantly.

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The Bank of England commented, “Analysis suggests that the additional insurance provided by the affordability test is minimal.”

Additionally, the bank “noted some concerns with how the affordability test has operated”.