On Monday 20 June 2022, the Bank of England announced that it would be withdrawing the mortgage market affordability test – aka the mortgage affordability rule – following a review by the Bank’s Financial Policy Committee (FPC) into the current state of the mortgage market. The withdrawal came into effect from 1 August 2022.
A stress test mechanism to work out whether prospective homeowners seeking a mortgage loan would be able to repay said loan, the mortgage market affordability test was introduced in 2014 alongside the loan to income (LTI) ‘flow limit’.
The mortgage market affordability test meant that for borrowers to be eligible for a mortgage, they had to prove that they could still afford to pay their mortgage repayments even if their mortgage rate increased above their lender’s standard average rate of 3%. The LTI flow limit put a limit on the number of mortgages which could be offered to borrowers with a loan to income ratio of 4.5 times their salary (per person) or higher.
The mortgage market affordability test and the LTI flow limit were both recommended by the Bank of England in the aftermath of the 2008 financial crisis to assist with the relaxation of mortgage underwriting standards whilst protecting the central banks from increased levels of debt and the risk of financial instability in the event that interest rates suddenly increased.
In 2014, interest rates had been predicted to hit 2.25% by 2019, hence the decision. However, over the next few years as interest rate predictions began to change and seemed unlikely to rise as steeply as originally thought, the Bank of England decided towards the end of 2021 that the mortgage market affordability test could be withdrawn.
However, since this decision was made, inflation rose at its fastest rate in over 40 years and hit 11.1% in the 12 months to October 2022. Consequently, the Bank of England raised the interest rate significantly from the historically low levels seen in 2021, reaching 5.25% in August 2023 before subsequently being reduced. As of September 2026, the interest rate stands at 3.75%, following a period of gradual easing in monetary policy. The next interest rate review is scheduled for 5 November 2026.
Whilst the mortgage market affordability test was still withdrawn as of 1 August 2022 as planned, the LTI flow limit remains in place. Following its assessment of the mortgage market, the Bank of England’s FPC concluded that the LTI flow limit, alongside the wider affordability assessments required under the FCA’s Mortgage Conduct of Business (MCOB) responsible lending rules, would provide an appropriate level of resilience to the UK financial system in a simpler, more predictable and proportionate way. The LTI flow limit has subsequently been amended so that, while the aggregate level of high-LTI lending remains subject to a 15% limit, individual lenders can exceed 15% of their new mortgage lending at or above an LTI ratio of 4.5 times income, subject to the aggregate market flow remaining consistent with the 15% limit.
But what does this mean for you?
The initial assumption for prospective homebuyers seeking a mortgage was that they would be able to get a bigger mortgage as of 1 August 2022. However, this is not necessarily the case.
There have been some homebuyers who are now able to borrow sufficient capital to be able to buy a home – or a more expensive home than first thought – who may not have been able to qualify for a mortgage originally with the additional stress test of the mortgage market affordability test.
However, whilst one particular affordability rule may have been scrapped, there are still a number of requirements that your mortgage lender will need you to meet when it comes to assessing your ability to repay a mortgage loan.
Who has benefitted the most?
First time buyers – particularly those with smaller deposits and lower incomes – who have previously struggled to meet what is essentially a hypothetical affordability rule will certainly have benefitted from the mortgage market affordability test being scrapped. As have homebuyers who have had to borrow a relatively high amount in comparison to their salary and/or are likely to need to remortgage down the line.
If you are currently repaying a mortgage or plan to submit a mortgage application in the near future and want to find out more information on affordability requirements and other aspects of the mortgage process, head to our useful mortgage guide at https://www.yopa.co.uk/homeowners-hub/guide-to-mortgages/
