Affordability test scrapped: what ‘huge’ mortgage rule change means for buying a house

The Bank of England has scrapped a key mortgage affordability test first introduced after the 2008 financial crisis.

The stress test required lenders to assess whether homebuyers would be able to repay their mortgage if interest rates increased by 3% on top of their standard variable rate.

Introduced in 2014, it was “part of a package of measures designed to prevent a repeat of the reckless lending that some say was rife” in the run-up to the global financial crash, said The Guardian.

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Commentators have said that while the move to scrap the test would be “welcomed by many, there was a risk that some people would take out mortgages they were unable to afford”, added the paper.

Good news for homebuyers

The Bank of England took the decision as a “means to cut red tape on the mortgage approval process and remove one of the many barriers between prospective borrowers and lenders”, said the Daily Express.

The change, which comes into effect today, will be “good news to many” as it “could allow more people to get on the ladder as they can take out larger mortgages”, said Claire Flynn, mortgages expert at money.co.uk.

However, the Express noted that it comes “despite soaring inflation rates”. The Bank of England has already pushed the interest rate up to 1.25%, with another rate decision due to be made on Thursday.

The risk of lifting the stress test is that “some buyers will take out loans that they are unable to afford”, warned Flynn.

Mitigating risk

The Bank “believes the affordability stress test was unrealistic”, said the i news site, as buyers are more likely to stick with fixed deals than end up on standard variable rates, which are often much higher.

The chances of homeowners being subjected to the standard variable rate plus 3% in reality was therefore “slim”, said the news site.

It added that the Bank’s loan-to-income limit still remains in place to prevent homeowners borrowing more than they can repay. This means buyers cannot take out a loan more than 4.5 times their salary.

The Daily Mirror called it a “huge” change, saying the previous rule caused around 6% of people to take a smaller mortgage than they otherwise might have.

But Myron Jobson, senior personal finance analyst at Interactive Investor, said first-time buyers should be particularly careful about “biting off more than they chew”, as many “have seen their desperate efforts to buy thwarted by runaway house prices and the cost-of-living squeeze on deposit building”.