The Bank of England has announced a consultation on its mortgage affordability stress testing rules.

Currently, these rules mean borrowers must prove they can still afford their mortgage repayments if interest rates went up by 3 per cent. The Bank of England has now announced that it will consult on scrapping this rule.

Even without this rule in place, lenders would still stress test borrowers, but they would instead apply the Financial Conduct Authority’s looser, more flexible rule.

Lenders will still have to check borrowers can afford their repayments based on where markets expect interest rates to move during the first five years of their loan or at a rate one per cent higher than today’s, whichever is higher.

What does this mean for borrowers?

Unless lenders think interest rates will rise more than 3 per cent over the next five years, the potential upcoming change will make the stress test easier for borrowers. This, in turn, will unlock access to mortgage finance for more people and will allow households to borrow more, at least in the short term.

Households will still face limits on what they can borrow relative to their incomes. There is a limit on lending people more than 4.5 times their annual income. Banks can lend at higher multiples than this, but these loans can’t make more than 15 per cent of their mortgage lending. Most firms are well below this 15 per cent limit.

What impact will this have on house prices and affordability?

The immediate impact of relaxing stress test rules will be improved affordability for people buying a home.

However, this affordability headroom may not last for long. As households across the board benefit from increased borrowing capacity, we would expect to see them bid prices up. Ultimately, the risk is that households will buy the same homes they would have before but will pay more money for them.

Further information

Contact Lawrence Bowles

Savills Research