FPC withdraws mortgage affordability test Recommendation

The FPC made the announcement following its latest review of the mortgage market, with the affordability test Recommendation being withdrawn from 1 August 2022.

The test was introduced in 2014, and specifies a stress interest rate for lenders when assessing prospective borrowers’ ability to repay a mortgage.

The FPC’s other Recommendation will remain in place. This is the loan to income (LTI) “flow limit”, which limits the number of mortgages that can be extended to borrowers at LTI ratios at or greater than 4.5.

The Recommendations were introduced to guard against a loosening in mortgage underwriting standards, as well as a material increase in household indebtedness that could in turn amplify an economic downturn – and thus increase financial stability risks.

In December 2021 the FPC judged that the LTI 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 in a scenario of rapidly rising house prices.

It concluded recently the LTL flow limit without the affordability test, but alongside the wider assessment of affordability stipulated by the Financial Conduct Authority’s (FCA) Mortgage Code of Business (MCOB), would provide “the appropriate level of resilience”.

Lenders do not need to make any changes as a result, as current affordability assessments ought already to be compliant with the FCA’s MCOB framework.

The research comes as analysis has found residential mortgage loans rose by 4.4% in Q122.