"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"
In 2014, the FPC introduced two recommendations to guard against a loosening in mortgage underwriting standards: the ‘flow limit’ which limits the number of mortgages that can be extended at LTI ratios higher than 4.5; and the ‘affordability test’ which specifies a stress interest rate for lenders when assessing prospective borrowers’ ability to repay a mortgage.
The affordability test requires lenders to assess whether borrowers could continue to afford their mortgage if their mortgage interest rate increased to 3 percentage points above their Standard Variable Rate.
The FPC’s review found that the measure on lending at high loan-to-incomes was more effective at reducing risk in a housing boom, while also having less impact on borrowers in normal times.
The FPC concluded that the FCA’s rules on affordability testing combined with the FPC’s loan-to-income limits "should be enough to protect UK financial stability". The FPC therefore intends to consult in 2022 Q1 on withdrawing its affordability measure.
In its report, the FPC said: "Since the measures have been introduced, mortgage debt to income has been broadly stable. In the recent period of high house price growth, there has been little evidence of a deterioration in lending standards, a material increase in aggregate household debt or the number of highly indebted households.
"In addition, the FPC’s analysis suggests that the measures have relatively little impact on mortgage market access, and that raising a deposit remains the most significant barrier to access, particularly for first-time buyers. In aggregate, there remains a significant degree of headroom below the LTI flow limit.
"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 and the number of highly indebted households when house prices rise rapidly. A framework without the FPC’s affordability test would therefore be simpler and more predictable. It would also reduce the impact on a small proportion of borrowers.
"The LTI flow limit, without its affordability test but alongside the FCA’s affordability testing under its Mortgage Conduct of Business framework, ought to deliver an appropriate level of resilience to the UK financial system, but in a simpler, more predictable and more proportionate way."
Paul Broadhead, head of mortgage and housing policy at the BSA, said: “We welcome the Financial Policy Committee's intention to withdraw the affordability stress test for new mortgages. This measure mainly impacts certain borrowers, such as first-time buyers and those looking to buy in the South East, who can clearly afford a mortgage but are hindered by the requirement to test that they could still pay their mortgage if rates were in the region of 6%+.
"Lenders will continue to check that a mortgage is affordable both now and if interest rates increase in line with market expectations."
