"Loan-to-income limits and the 3% stress test have placed unrealistic demands on borrowers when compared to the rates they have actually been paying, or could expect to pay."
In 2014 the FPC introduced two recommendations to guard against a loosening in mortgage underwriting standards and a material increase in household indebtedness.
The recommendations introduced were the LTI ‘flow limit’, which limits the number of mortgages that can be extended at loan to income ratios at or greater than 4.5, and the ‘affordability test’, which specifies a stress interest rate for lenders when assessing prospective borrowers’ ability to repay a mortgage.
In a December 2021 review, the committee considered a scenario of rapidly rising house prices where, without any policy measures, financial stability risks would increase sharply. Its analysis found that both of its recommendations on their own would mitigate the increase in risks, but the LTI flow limit is likely to play a stronger role than the affordability test in guarding against an increase in household debt.
The FPC judged that the LTI flow limit alone, alongside the wider assessment of affordability required by the FCA’s Mortgage Conduct of Business (MCOB) framework, would deliver an appropriate level of resilience "but in a simpler, more predictable and more proportionate way".
Therefore, the Committee has decided to maintain the LTI flow limit Recommendation and to consult on withdrawing its affordability test recommendation.
In the consultation, published today, the FPC is seeking the views of interested parties on the proposal to withdraw the affordability test.
The consultation, in particular, asks the following questions:
- What impact is the affordability test recommendation currently having on the mortgage market?
- How would lenders and the mortgage market respond if the recommendation were withdrawn?
- What effect withdrawing the recommendation may have on the housing market as a whole and on particular segments of the market?
The consultation will close on 6th May 2022 after which the responses will be considered by the FPC. In the event of deciding to withdraw its affordability test, the FPC would expect to formally withdraw the affordability test within 12 months of making the decision.
Kate Davies, executive director at IMLA, commented: “After proposals on the topic last year, today’s announcement of a consultation on removing the affordability stress test for mortgage applications will come as no real surprise to the sector, but is still very welcome. For some time, IMLA has been arguing that the combination of FCA MCOB rules, loan-to-income limits and the 3% stress test have placed unrealistic demands on borrowers when compared to the rates they have actually been paying, or could expect to pay.
“We are particularly interested in the FPC’s analysis that the LTI flow limit is likely to play a stronger role than the affordability test in guarding against household indebtedness, and we shall be considering each measure’s relative effectiveness carefully as we develop our response to the consultation.”
