The move will take effect in August
Last week, the Bank of England announced the decision to abolish mortgage stress tests which are set at 3%, with the idea that this would make it easier for borrowers to access mortgages.
The move, which will take effect in August this year, will loosen up the lending market for many, however stress testing will still apply in the form of the loan-to-income (LTI) ratio, which is set at 4.5 times a borrower’s salary.
“In recent days lots has been made of the Bank of England removing the stress test for first time buyers, with allusions to the return of pre-2007 lending habits,” commented Daniel Mach, chief operating officer of Active Financial and Active Network.
However, Mach believes the headlines drawing a likeness to pre-2007 lending habits are clickbait.
He explained that the rules already allowed for those stress tests to be relaxed for borrowers applying for a fixed rate of five years or more.
The introduction of stress testing came in 2014 and was created due to the consequences of the financial crash; the Financial Policy Committee introduced the tests with the intention to curb the possibility of another crash, which is why a likeness has been drawn to pre-2007 lending habits, Mach explained.
Read more: Bank of England decides to drop affordability test
Bank of England figures show that the mortgage stress tests will not necessarily make much difference overall, with only 6% of people taking smaller mortgages than they otherwise might have as a result of the 3% rule, over the past year.
“More importantly, the Bank of England's LTI flow test will remain in place,” Mach said.
As such, every lender is limited in how many mortgages they can offer at a higher income multiplier.
“So there is a hard cap on the number of mortgages that potentially stretch what someone could afford, and those mortgages exist for very good reasons,” Mach added.
For first-time buyers in particular, Mach pointed towards professional mortgages which allow those starting in certain careers to increase their multiplier, as well as some types of guarantor or family mortgages, for example.
Lenders often offer higher multipliers for those in jobs such as doctors, lawyers and dentists, as the wage growth in those roles is highly likely to increase substantially once they progress to more senior positions.
In addition, Mach explained that by being able to provide a deposit of 25% or more, some lenders will be willing to offer a higher multiplier as the risk is lower for them because the would-be buyers have more of an investment in the property.
With interest rates steadily rising, following further increases by the Bank of England to the base rate last month, improving affordability for mortgage borrowers is likely to mitigate some of the effects and allow the housing market to continue operating efficiently.
The Bank of England calls this stress test the affordability test, but Mach explained that this is not to be confused with other affordability rules or guidance set out by the Financial Conduct Authority.
“The principles of responsible lending and general affordability remain in place and unchanged,” Mach added.
Read more: Changes to affordability stress-tests are welcome but can’t be abused
Similarly, Mach outlined that the Prudential Regulation Authority still tests lenders for broader financial resilience and extreme economic scenarios, with repercussions if they routinely fail those tests.
“The end result? If you are applying for a five-year fixed rate, this change makes absolutely no difference,” Mach said.
If you are applying for a shorter fixed rate, or a variable rate mortgage, then, for most, Mach said there will still be no difference as other rules or approaches are in place.
“This change will aid a smaller number of applicants who might have been caught out by the stress test, especially in a rising interest rate market, though for most, it is business as usual,” he added.
While some within the industry believe these changes present an opportunity to borrowers and the housing market, given the current economic climate, many have said that ‘if it isn’t broke, don’t fix it.’
