For the past eight years, the Bank of England’s affordability test has ensured that prospective homeowners could withstand a 3 percent point rise in interest rates before taking out a mortgage. So, why are they suddenly ditching it at a time when the country is facing some of the highest interest rate increases in decades?

What’s happening?

By the end of July 2022, the Bank of England is set to scrap the ‘affordability test’ which has been obligatory for banks to carry out on potential home buyers.

The removal of the, what has been compulsory, test, has been met with raised eyebrows in question of why it’s happening at a time when interest rates are increasing often and the country is amidst a cost-of-living crisis with soaring inflation.

So, why did they do it?

One of the main reasons behind this change is that according to the Bank of England, the test is simply unnecessary now (a reasoning which also coincides with the Conservative Government’s desire to remove “unnecessary” regulations).

They also claim that other measures are still in place, such as limits, which stop banks from signing off on too many high-multiple earnings mortgages, and also that the FCA (Financial Conduct Authority, their sister regulator) still operates a stress test to see whether borrowers could cope with a 1 percent point rise, all of which reduces the need for their own borrowing criteria.

But what could this mean for the housing market which is already treading water?

The Impact

According to the Bank of England, this change could see up to 6% of borrowers who previously had to take out a smaller mortgage due to the affordability test being able to borrow more. And, while this is somewhat positive and may boost spending in the economy, concerns have risen with a foreboding recession on the horizon and consumer wallets also being tighter due to soaring costs of living, interest rates and inflation.

Could this now mean that people will feel encouraged to take out a loan which they cannot afford?

However, despite these concerns, the mortgage industry makes contrasting comparisons of the current situation to those of the 2008 Financial Crisis, and in doing so, claims that the industry ‘will be fine’, even with a set of tough years ahead.

They also place a lot of belief in banks having lesser reliance on volatile wholesale funding to finance their borrowing, and say that they can now rely more on their own cash cushions.

With that being said though, the current house price inflations alone have been at a great high for the past 20 years and in recent times, the UK House prices relative to wages are significantly off-balanced which is something to bear in mind.

For example, according to the Office for National Statistics, the average house price in the UK is £250,000 which is nine times the country’s average earnings.

Final Thoughts

With houses costing more than many can afford and the UK currently facing one of the country’s toughest cost-of-living crises, the Bank of England’s decision to ditch the affordability test immediately appears to be an odd move and leaves us asking:

Could it cause people who cannot truly afford to borrow to get themselves into a tricky situation? Or could this be an attempt to try and boost spending in the economy before a recession rolls in?

We’ll have to wait and see.

If you’re concerned about your mortgage in response to the current climate or have any mortgage queries of your own, contact our team of friendly advisors who have years of experience in the mortgage industry and are ready to give you a helping hand.

Coffey Brooks are a team of Independent Financial and Mortgage Advisers based in Clacton-On-Sea, Essex and are directly authorised and regulated by the Financial Conduct Authority.