Personal Finance

Bank of England scraps mortgage affordability test


Thousands of potential homebuyers may find it easier to get on to the property ladder after a key mortgage affordability test was scrapped by the Bank of England.

The central bank has said the change – taking effect from 1 August – should not be viewed as “a relaxation of the rules”. However, some commentators said that while the move would be welcomed by many, there was a risk that some people would take out mortgages they were unable to afford.

The Bank has removed a requirement that forced borrowers to be able to afford a three-percentage-point rise in interest rates before they could be approved for a home loan.

This “stress test” was introduced in 2014, after the 2007-08 financial crisis, and was part of a package of measures designed to prevent a repeat of the reckless lending that some say was rife in the run-up to the crash.

The Bank has said another rule that is staying in place – which limits most new mortgage lending to a maximum of 4.5 times a borrower’s income – as well as separate affordability criteria set by the Financial Conduct Authority, “ought to deliver the appropriate level of resilience to the UK financial system, but in a simpler, more predictable and more proportionate way”.

The Bank has previously indicated that about 6% of mortgage borrowers – approximately 35,000 people – would have been able to secure a bigger home loan if the interest rate stress test had not been in place.

Claire Flynn, a mortgages expert at the comparison website Money.co.uk, said given the cost of living crisis, the removal of the affordability test was likely to be viewed by many as good news.

She added: “That’s because it could allow more people to get on the ladder as they can take out larger mortgages. However, borrowers will still need to meet the loan-to-income ratio, which could still prevent some from getting the mortgage they require to buy a home.

“There is also a risk that with fewer restrictions, some buyers will take out loans that they are unable to afford.”

Myron Jobson, a senior personal finance analyst at the website Interactive Investor, said unwinding the measure amid the cost of living crisis “could run the risk of people biting off more than they [can] chew financially to purchase a property”.

Banks and building societies look at various aspects of people’s finances when deciding how big a mortgage they think someone can afford to take out, and traditionally the typical maximum for how much an individual can borrow is 4.5 times their annual income. This is commonly known as the income multiple.

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Banks can offer higher income multiples, but only on a set proportion of their lending.

With house prices having risen sharply, Halifax and Barclays are among the lenders that have been going up to 5.5 times income for high-earning borrowers, while the mortgage lender Habito will go up to seven times salary in some cases.



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