Bank of England Announces New Mortgage Affordability Test

Mark Carney, Governor of the Bank of England

Mark Carney, Governor of the Bank of England

Mark Carney, Governor  of the Bank of England (BoE), has proposed a new mortgage affordability test to curb the proportion of home loans that can be lent  at more than 4.5 times their income. The measures are being touted as an attempt to prevent dangerous levels of household debt.

A consultation paper has been published today and will be open for comments until 31 August 2014 with the final rules will come into effect on 1 October 2014.

The key recommendations are:

  • Ensuring lenders check mortgage applicants can cope with a 3% rise in interest rates
  • Insuring against risky lending by putting a 15% cap on the number of mortgages that banks and building societies can give to people who want to borrow more than 4.5 times their income
  • A separate Treasury pledge that bans anyone applying for a loan through the Help to Buy scheme borrowing any more than 4.5 times their income

The BoE said that of all the new home loans made by banks no more than 15% can be at loan to income multiples of 4.5 and above.

As currently just 11% of new mortgages are at such high loan to value multiples this move should not have an immediate effect on the current housing market or suddenly harm a buyer’s ability to get on the property ladder.

The BoE also instructed banks to apply a more stringent affordability test on all new mortgages. Lenders will have to assess whether borrowers will be able to afford repayments if interest rates were to rise from their present record lows of 0.5% to 3.5% over the next 5 years

In good news for the Private Rented Sector the BoE added that the new loan-to-income curbs will not apply to buy-to-let loans or Remortgages (provided borrowers do not add to the principal debt).

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