The Bank of England plans to scrap rules introduced in the aftermath of the financial crisis designed to test whether borrowers could afford their mortgages in the event of significant interest rate rises.
The central bank’s Financial Policy Committee said it would withdraw the so-called affordability test from Aug. 1, according to a statement Monday. The rule, introduced in 2014, requires lenders to test prospective borrowers ability to repay their mortgages in the event that rates rise to a specified stress level. The bank’s loan-to-income flow limit that keeps a lid on the number of borrowers with loan-to-income ratios above 4.5 times will stay in place, the BOE said in the statement.
The end of an era of rock bottom rates threatens to upend a UK housing market that was supercharged by the pandemic. The bank’s monetary policy committee raised the benchmark interest rate for a fifth successive time last week to 1.25% in a bid to reduce inflation.
“The Financial Policy Committee judged that the loan-to-income 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 in a scenario of rapidly rising house prices,” according to the statement.
Borrowers will still be assessed under the Financial Conduct Authority’s wider lending rules on affordability. Taken together with the loan-to-income limits retained by the Bank of England, those rules “ought to deliver the appropriate level of resilience to the UK financial system, but in a simpler, more predictable and more proportionate way,” the central bank said in the statement.
The central bank’s strong line on the loan-to-income flow limit will disappoint some bank executives who would like the cap lifted. Under BOE rules, banks cannot lend more than 15% of their total mortgage book to borrowers looking for more than 4.5 times their annual income. Some would like it raised to 20%.
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