An affordability test for mortgage lending will be ditched from August, the Bank of England has confirmed.
The Bank has previously consulted on the potential impacts that withdrawing the affordability recommendation could have on mortgage lending, and it confirmed on Monday that the withdrawal will happen from August 1. Two mortgage recommendations were introduced in 2014, to help guard against a significant increase in household indebtedness that may make any economic downturn worse.
These were a loan-to-income (LTI) limit and the affordability test, which specifies a "stress interest rate" for lenders to consider when assessing a potential borrower's ability to repay a mortgage over time. The LTI limit, which will remain in place, limits the number of mortgages that can be extended to borrowers at LTI ratios at or greater than 4.5.
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According to data from Rightmove released on Monday, the average asking price across Britain stands at £368,614 - with June marking the fifth month in a row that it has hit a record high.
The Government recently announced an extension of the Right to Buy scheme in England and an independent review of access to mortgage finance for first-time buyers, with the aim of widening access to low-cost, low-deposit finance such as 5% deposit mortgages.
The Bank's Financial Policy Committee (FPC) judged that the LTI flow limit is likely to play a stronger role than the affordability test in guarding against an increase in overall household indebtedness and the number of highly indebted households in a scenario of rapidly rising house prices.
Therefore the LTI limit without the affordability test, but alongside the wider assessment of affordability required by the Financial Conduct Authority (FCA)'s responsible lending rules, should deliver the appropriate level of resilience to the UK financial system, but in a simpler, more predictable and more proportionate way, the Bank said.
The Bank added that the majority of consultation responses were supportive of the proposals. It said lenders do not need to make changes as a result, as current affordability assessments should already be compliant with the FCA's responsible lending rules.
Evidence from previous recessions suggests that in an economic downturn, highly indebted households are more likely to cut spending sharply, having the effect of amplifying downturns.
Some potential borrowers may find it more of a struggle to afford a home loan in any case as the mortgage rates being offered by lenders are creeping up, following a string of Bank of England base rate hikes.
Financial information website Moneyfacts.co.uk said on Monday that the average mortgage standard variable rate (SVR) reached 4.91% in June, marking the highest level it has recorded since February 2009.
Mortgage borrowers may end up on an SVR when their initial deal comes to an end. The average overall two-year fixed-rate mortgage stands at 3.25% - the highest since November 2014 - Moneyfacts said.
The overall five-year fixed-rate average sits at 3.37% and is the highest on Moneyfacts' records since June 2015. The average two-year tracker rate is 2.54% - the highest since September 2014.
The Moneyfacts averages take all deposit sizes into account. Eleanor Williams, a finance expert at Moneyfacts, said the 0.12 percentage point gap between the average two and five-year fixed rates is the smallest the website has seen since 2013.
She continued: "Average rates for those with higher levels of equity or deposit have seen some of the steepest increases, which may come as a surprise as products at this end of the LTV (loan-to-value) spectrum have traditionally been priced lower, in part due to the smaller risk of default they tend to pose for providers."
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