- What impact is the affordability test Recommendation currently having on the mortgage market?
- How would lenders and the mortgage market respond if the Recommendation were withdrawn?
- What effect withdrawing the Recommendation may have on the housing market as a whole and on particular segments of the market?
The consultation follows two Recommendations that were introduced in 2014 by the FPC to increase financial stability risks. The Recommendations were:
- The LTI ‘flow limit’, which limits the number of mortgages that can be extended at loan to income (LTI) ratios at or greater than 4.5; and
- The ‘affordability test’, which specifies a stress interest rate for lenders when assessing prospective borrowers’ ability to repay a mortgage.
The FPC has regularly reviewed these Recommendations and in its latest review, published in the December 2021 Financial Stability Report, the committee considered a scenario of rapidly rising house prices. The FPC’s analysis found 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.
Therefore, as announced in the December 2021 Financial Stability Report, the Committee decided to maintain the LTI flow limit Recommendation and to consult on withdrawing its affordability test Recommendation.
The consultation will close on 6 May 2022.