Is the Bank of England’s axing of mortgage affordability ‘utter madness’?
Following a consultation, the Bank of England’s Financial Policy Committee FPC has decided to withdraw the affordability test Recommendation with effect from 1 August. This means that lenders will no longer have to verify whether homeowners could afford mortgage payments at higher interest rates.
For freelancers and the self-employed, the news could be welcome, especially as applying for a self-employed mortgage can be extremely stressful and touch and go if you don’t go through a specialist mortgage broker who understands the salary patterns of freelancers, as previously reported by The Freelance Informer in this report, Contractors looking to buy a new home or switch mortgages need to spot these red flags.
However, at the time of writing inflation in the UK was at a hefty 9.1% with interest rates likely to rise more later this year, so do not presume an easy touch.
It will be up to individual lenders as to whether they wish to make any changes to their own lending practices and to determine the timing of any such changes after this date.
For example, the withdrawal of the FPC affordability test does not place any requirement on lenders to take action, as existing affordability assessment practices are subject to the FCA’s MCOB framework and will remain so.
The FPC judges that a notice period of six weeks appropriately balances the desirability of giving lenders notice ahead of the change in policy and the desirability of minimising the risk of borrowers delaying purchases due to uncertainty about how reversion rates and the stress rate might move in future.
But not everyone is jumping for joy over the changes.
The Bank of England’s plans to scrap mortgage affordability rules have been branded as “utter madness” by Nigel Green, the CEO of financial advisory deVere, who says the move underscores how the central bank is “failing Britain.”
“This move by the Bank of England is bizarre, to say the least,” says Green.
“The current affordability checks include a stress test to cover rising interest rates in order to avoid another 2007-style credit crunch.
To scrap this important check to try and ensure borrowers don’t take on more debt than they could afford, at a time when rates are rising and the UK is facing a significant economic downturn, is utter madness.Nigel Green, the CEO of financial advisory deVere
“Some might argue that the risks are pretty low, given the loan-to-income rules would remain intact, but they are risks nonetheless that borrowers and the UK economy can do without,” he says.
David Robinson, chartered wealth manager at Wildcat Law, says scrapping affordability tests now, just at the point they are most needed, is a bit like “chucking the parachute out as your plane engine stops.”
He explains his line of thinking: “The argument is that multiples of earnings are perfectly fine, just as they were during the Credit Crunch. Affordability calculations were introduced post Credit Crunch because part of the failure in the mortgage market was down to just looking at mortgage multiples.
Welcome to the lending Wild West, where Banks are once again able to police themselvesDavid Robinson, chartered wealth manager at Wildcat Law
What do affordability checks take into consideration?
“Affordability calculations take into account the other myriad expenditures a household may have,” says Robinson.
“This is especially relevant now as we know that everything from household utilities to the cost of school uniforms is going up. This will increasingly squeeze family budgets and make income multiples less and less accurate as a measure of risk and affordability. Welcome to the lending Wild West, where Banks are once again able to police themselves,” he says.
When will the affordability test be officially scrapped?
The central bank’s Financial Policy Committee said it would withdraw the affordability test from 1 August, according to a statement.
The rule, introduced in 2014, requires lenders to test prospective borrowers’ ability to repay their mortgages in the event that rates rise to a specified stress level.
The deVere CEO goes on to add: “To many, this move will underscore how the Bank of England is floundering in its duty of care and therefore failing Britain in these uncertain times.
“Its response to fighting red-hot inflation, which is at its fastest rate in four decades, has been slow off the mark, hitting households and businesses hard.
“It has failed to mention how Brexit is a negative drag on the supply side,” he adds.
Another credit crisis on the cards?
Green is concerned that global investors are now being warned to hedge against an ‘existential’ crisis with the pound by Wall Street analysts as the British currency faces issues “usually only seen in emerging markets.”
Whilst sterling strengthened 0.2% in May, it remains the third-worst performing major currency this year. It has weakened 8% to $1.2468 in 2022.
Nigel Green concludes: “The Bank of England appears to be becoming increasingly politicised. For me, and many others, this is raising red flags.”