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The Bank Of England Opens the door to bigger Mortgages in 2022.

The Bank of England will begin consultation on withdrawing its affordability test recommendation in 2022.


The Bank of England is to consider relaxing mortgage affordability tests in a move that will stoke fears over a further surge in house prices.


The rules limit the number of mortgages that banks can lend at high loan-to-income ratios and introduce affordability checks, stopping households building up too much debt.


The FPC’s mortgage market recommendations, which it introduced in 2014, strengthened affordability assessments to prevent consumers from taking on unaffordable mortgages and made firms consider the impact of future interest rate rises on affordability.


Since then, interest rates have stayed close to record lows, and although financial markets expect the BoE to start raising rates soon, they do not see borrowing costs getting anywhere close to levels seen before the financial crisis.


The BoE said a lower long-term outlook for interest rates did not automatically mean smaller risks for borrowers, as it partly reflected weaker prospects for incomes and meant there was less scope for borrowing costs to fall in a downturn.


In its latest Financial Stability report, the Financial Policy Committee (FPC) said that it would maintain its loan to income (LTI) for residential mortgage recommendations, which asserts that 15 per cent of the total number of new residential mortgages should not have a LTI ratio at or greater than 4.5. This applies to lenders whose residential mortgage lending is above £100m per year.

The FPC said that the LTI measure was more effective at reducing risk in a housing boom and had less impact on borrowers in normal times.


Officials said that the affordability test provides little extra protection when interest rates are very low and removing it would make the rules “simpler and more predictable” while reducing the impact on a “small proportion of borrowers”.


The Bank estimates that one in 20 borrowers took out smaller mortgages than they would have been able to because of the affordability test, amounting to about 30,000 households a year.


Economists have warned that loosening the affordability checks could result in more large house price increases and spark worries of a property bubble. However, the Bank is relaxed about ditching the affordability test while keeping the cap on banks’ lending to those borrowing a large amount relative to their income.


The Bank said: “The Financial Policy Committee's analysis suggests the loan-to-income flow limit is likely to play a stronger role than the affordability test in guarding against an increase in aggregate household indebtedness and the number of highly indebted households when house prices rise rapidly, and that the additional insurance provided by the affordability test would be small.”

It added that the lending cap, combined with separate affordability testing by the Financial Conduct Authority, “ought to deliver an appropriate level of resilience to the UK financial system”.

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