On 28 February 2022, the Financial Policy Committee (FPC) issued a consultation seeking views on the withdrawal of the mortgage affordability test.
In 2014 the FPC issued two recommendations that sought to prevent a loosening in mortgage underwriting standards and a material increase in household indebtedness that could amplify an economic downturn. The recommendations introduced a loan to income (LTI) ‘flow limit’, which limits the number of mortgages that can be extended at loan to income ratios at or greater than 4.5 and the ‘affordability test’, which specifies a stress interest rate for lenders when assessing prospective borrowers’ ability to repay a mortgage.
In its December 2021 Financial Stability Report, the FPC decided to maintain the LTI flow limit recommendation and consult on withdrawing its affordability test recommendation. The FPC judged that the LTI flow limit, without the affordability test recommendation, but alongside the wider assessment of affordability required by the FCA’s Mortgage Conduct of Business framework, ought to deliver an appropriate level of resilience to the UK financial system, but in a simpler, more predictable and more proportionate way.
In its consultation on the mortgage affordability test the FPC is asking interested parties for their views including how lenders and the mortgage market would respond if the recommendation were withdrawn.
The deadline for comments on the consultation is 6 May 2022.