The Financial Policy Committee of the Bank of England in its latest Mortgage Market Review (MMR) has confirmed that it is to withdraw the requirement for mortgage lenders to complete a mortgage affordability stress test for borrowers from 1 August 2022.
What is the Mortgage Affordability Stress Test?
This was introduced in 2012 after the original Mortgage Market Review (MMR) following the credit crunch crisis of 2008/09, with banks being bailed out by governments across the world due to having ‘toxic’ debt i.e., loans outstanding that people could not afford. One well known lender that ‘went under’ was lending over 9 X income before the crisis.
MMR introduced an affordability test, not just if a borrower could afford the mortgage today but also with other tests such as:
Bank of England Decision
The FPC at the Bank of England has concluded that with interest rates now rising and looking likely to increase further, the SVR + 3% stress test is now largely redundant given that mortgage underwriters and lenders are better tuned to check affordability as well as Financial Conduct Authority (FCA) conduct of business rules mean that all mortgages must be demonstrated to be suitable for the borrower too.
With increased mortgage lending rates, the FPC believes that the 4.5 X income rule, alongside higher borrowing costs is now sufficient.
We agree and disagree with the decision to remove the stress test. When advising clients, we will continue to use a stress test, so that clients can still better understand what their mortgage cost and affordability would be if interest rates increase. Never forget, back in 1989, lending rates for some were over 15% pa. Rates will rise and it is better for a borrower to understand what their costs would be if interest rates hit say 10%pa.
That said, we also believe that the stress test restricted and indeed trapped many borrowers. For two clients on the same income, their lifestyle and living expenses may be totally different, so their affordability will be totally different yet they both fail to secure a mortgage. We have also met clients on very low incomes that can afford to pay rent of say £700pm but failed to secure a mortgage when the mortgage cost on the same property was £400pm.
In addition, this should help so called ‘Mortgage Prisoners’ who borrowed before the credit crunch at say 9 X income, they have not missed a mortgage payment, but they cannot remortgage as another lender would struggle to lend them the required amounts with a stress test and standard suitability/affordability underwriting deployed.
Cynic's View: The Government and the Bank of England need to keep the property market ‘ticking over’. Making it easier to borrow and stimulating the property market means that banks assets are protected and the government with make more in revenue on Help to Buy ‘Equity’ Deposit Loans, stamp duty and inheritance taxes due to higher property prices.