The Bank of England has confirmed its intention to remove the requirement for lenders to carry out interest rate stress tests on mortgage loan applications.
The Bank’s Financial Policy Committee introduced the test in the aftermath of the 2014 financial crisis to ensure borrowers could afford to change their monthly repayments.
It assessed how a borrower would react if their rate in the first five years of their loan was three percentage points higher than the bank’s standard variable rate.
Critics said the test was too high given low interest rates and the Bank had reviewed this policy since late last year and has now scrapped it.
Now the bank is arguing that a loan-to-income stream (LTI) limit on the number of home loans that can be granted above 4.5 times income and the Financial Conduct Authority’s lending rules should guard against against subprime loans.
The stress test rule will be removed in August.
But Gemma Harle, managing director of Quilter Financial Planning, said the decision was “puzzling” given the current rise in interest rates and soaring inflation.
She said: “With interest rates starting to rise to cope with the damaging impact of inflation and soaring energy and food prices, you would think that people’s ability to paying their mortgage should really be in the spotlight now.
“However, this move by the Bank of England may illustrate that the long-term health of the housing market should be less than rosy, and this change is a way to hedge against a real fall in property prices.
“While this is potentially a bad time for the announcement, the change in accessibility rules may not be as significant as it seems because the LTI “stream limit” will not be removed, which has a much greater impact on people’s ability to borrow.”
Harle said the rule change is one of many attempts to help first-time buyers get on the ladder, but could end up having the opposite effect as more people could apply for mortgages for an already limited stock.
She added: “At the end of the day, one of the key strategies the government should adopt to help first-time buyers get on the ladder is simply to build up more stock.
“This has the natural effect of stabilizing real estate prices and bringing them down due to the laws of supply and demand. This will be the only way to truly help the masses get on the housing ladder.
Lawrence Bowles, director of research at Savills, said: “From a market perspective, the removal of current stress tests could mitigate some of the impact of rising interest rates. In theory, at least, this should open up a bit more room for house price growth than what currently looks quite limited in the traditional housing market.
“That said, a fairly high proportion of recent buyers have circumvented the ‘standard floating rate plus 3%’ stress test by locking into five-year fixed rates, meaning it won’t preserve or open. additional borrowing capacity than for part of the market.
“Lenders will continue to stress test applicants to reflect where they expect interest rates to be five years from the start of the loan, in accordance with mortgage business rules.
“Improved capacity for growth would also depend on the extent to which lenders are willing to push income lending multiples within responsible lending rules and caps on what they can lend at loan ratios. / high income.
“This is unlikely to open the floodgates for mortgage lending. It should allow lenders to be slightly more flexible, which will be a welcome relief to some potential buyers who are struggling to keep up with current criteria due to growth. price spike of the past two years – but saving for a deposit will remain the biggest barrier to home ownership.