Mortgage lenders call for reduced affordability tests

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The trade body representing UK mortgage lenders has called on the Bank of England to reassess whether its affordability testing rules are making it too difficult for people to take out a mortgage.

Affordability tests – also called stress tests – were introduced following the financial crisis to ensure borrowers were able to afford their mortgage both now and in the future.

The Council of Mortgage Lenders (CML), which represents banks and other lenders, says this test is too difficult and has called for policy makers to “ease back” from the current position.

 

At present, mortgage borrowers are tested to see if they can pay back the mortgage rate as it stands today, and if it were to rise by 3% in the next five years.

However, this means a borrower taking out a two-year fix must be tested on whether they can afford to pay 3% above the lender’s standard variable rate (SVR) – meaning borrowers are often tested at a rate of 6% or 7%.

This 3% testing rate is set by the Bank of England’s Financial Policy Committee (FPC).

 

Peter Hill, chief executive of Leeds Building Society and chair of the CML, says the rules may be making it too difficult for first-time buyers to get onto the property ladder.

But while the CML believes the stress tests need “softening”, it isn’t suggesting what requirements the FPC should use instead.

Mr Hill says: "On behalf of the industry, we would now like to urge the FPC to take another look at its 3% affordability test. It is the CML’s view that the Bank’s policies risk having a net adverse effect on the housing market and it should be looking to soften the impact.

“A failure to do so may unnecessarily cramp the ability of home-owners to move house and undermine the smooth functioning of our housing market.”

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It would be a grave error to reduce the affordability tests as historically mortgage rates have been well over 7% and are surely going to revert to the norm in the future.
I remember paying over 15% interest on my mortgage and many who could not afford to service their debt lost their homes. So I think it prudent to keep the tests as they are or even increase the amount to 5%.

Thanks for your comment Melyn, you certainly raise a valid point. We've published your comment on the 'Letters' page of our June edition. 

Best wishes,

Helen