Protective measures
There are currently two measures in place to protect mortgage underwriting standards. These were introduced by the FPC in 2014. The first is the ‘flow limit’, which caps the number of mortgages that can be extended at loan-to-income (LTI) ratios higher than 4.5.
The second is the ‘affordability test’, whereby lenders assess whether borrowers could continue to afford their mortgage if the interest rate rose to 3 percentage points above their Standard Variable Rate.
A recent review conducted by the FPC found that the flow limit measure on lending at high LTIs was actually more effective at curbing risk in a housing boom. They stated, “The FPC’s analysis suggests that the LTI flow limit is likely to play a stronger role than the affordability test in guarding against an increase in aggregate household indebtedness.”
What does this mean?
Essentially, this means that the FPC believe that the current LTI flow limit measure provides an adequate level of protection against falling lending standards. They are therefore intending to consult in Q1 of 2022 on removing the affordability measure.
Part of the reason for this is that mortgage debt income has been reasonably stable since the measures were introduced, even in periods of high house price growth, as experienced recently. The report also highlighted that it found no material increase of aggregate household debt or the number of ‘highly indebted households.’
Who will benefit?
Removing the affordability test will make the application process simpler while also reducing the impact on a small number of borrowers.
Borrowers such as first-time buyers or those buying in expensive areas of the country, such as the South East of England, are likely to be most affected by the affordability test. This is because they are able to afford their mortgage as it stands but may be hindered by the tests, some of which may be applying interest rates of over 6% to their borrowing amount.
A welcome step
Removing the test will have a positive impact on these groups of buyers, as well as simplifying the process for lenders, while still keeping an adequate level of protection for the market in place.
One of our B Mortgage Services Advisers, Mark Walker, said:
Any policy change that helps first time buyers purchase their first home will be welcomed.
Lending will still be limited with loan to income limits and lenders own affordability assessments. Raising a deposit is and will remain as one of the largest barriers for first time buyers wishing to purchase their first home.”
The change in process will be particularly welcome following the recent news of house prices rising at the fastest rate in 15 years[2]. According to Halifax, house prices rose by 3.4% in the quarter to the end of November. This is the highest quarterly rate since late 2006 and means the average price of a home is now £272,992.
