Are mortgages set to become more affordable?

In 2014, stringent mortgage affordability requirements were introduced by the Financial Policy Committee (FPC) in response to the global financial crisis. Now, the Bank of England (BoE) has launched a consultation¹ on the removal of one of these requirements.

The first of the two requirements is a ‘loan to income’ requirement that sees lenders mostly limited to offering 4.5 times an applicant’s annual income. The second requirement is an ‘interest rate stress test’, which calculates an applicant’s ability to repay their mortgage if interest rates were to rise.

The BoE consultation

While the loan to income requirement looks set to stay, the BoE has launched a consultation into whether the interest rate test could potentially be removed. Despite evidence of falling mortgage rates over the past decade, the test is based on the average ‘reversion’ rate – i.e. the standard variable rate that borrowers are placed on following the end of a fixed-term deal – which has stayed largely static and is usually much higher than fixed-term rates. This means that borrowers must prove they can afford much higher repayments in order to take out a relatively cheap mortgage.

The BoE’s consultation is due to close in May 2022.

¹BoE, 2022

It is important to take professional advice before making any decision relating to your personal finances. Information within this article is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK.