In an effort to rein in family debt, the mortgage affordability test was implemented in 2014 but has now been scrapped by the Bank of England (BoE).

The BoE decision to abolish the mortgage affordability criteria began on Monday, August 1st, 2002. In theory, this should make it easier for those who work for themselves to purchase a property, but the bulk of people would get little benefit from it, according to mortgage industry experts.

The “flow limit” on loan-to-income ratios and the “mortgage affordability test” have been in place since 2014 for anybody seeking a mortgage to buy a home. The more crucial of the two tests—the flow limit test—limits the number of mortgages that may be extended to 4.5 times the mortgage applicant’s salary.

The other test, the affordability test, requires homebuyers’ finances to be scrutinised in order to determine whether or not they could afford to repay their mortgage if interest rates rose by 3%. Following the credit crunch, the Financial Policy Committee established the criteria as a safeguard against an increase in total household debt, which could exacerbate an economic downturn.

What does the affordability test for a mortgage entail?

If interest rates were to rise dramatically, it would affect whether or not you could still make your monthly payments. In the past, the test was used by lenders to determine if borrowers could afford their house loans in a variety of circumstances, such as if they lost their job or wanted to start or grow a family.

It’s important to keep in mind that if thorough affordability checks aren’t done, homebuyers may be forced to default on their mortgage payments as a result of reckless lending. As Jamie Jonson, CEO of FJP Investment, noted, “It’s critical that we learn from the mistakes made during the financial crisis.”

Previously, loan customers were asked a wide range of questions regarding their home expenditures, everyday costs, and work status while submitting documents such as payslips and bank statements as proof of their financial situation. As from August 1, 2022, this is no longer in effect, although the maximum loan-to-income ratio is.

What does this all mean?

With the removal of the affordability test, higher income people may be able to take out bigger loans, while lower income people may have a ceiling lifted. Due to the loan-to-income ratio restrictions, it will have a minimal impact on most borrowers, but the larger loan amounts that will be available as a result are seen as favourable by many.

“However, the Bank of England may also have to go further and consider eliminating the loan-to-income restriction if it wants to make mortgages really accessible in both today’s economy and in the future,” noted Mr. Johnson of FJP Investment.

Loan amounts might be tailored to individual borrowers’ needs, ensuring that those on interest-only mortgages weren’t punished by an all-or-nothing approach.

The effect on first-time homebuyers

In the long run, removing the test will help more first-time homebuyers, especially those who are self-employed and have their finances scrutinised more closely when qualifying for a mortgage. Having said this, many first-time buyers who are now renting will not find it difficult to pass the affordability test when they secure a competitive first-time buyer mortgage.

The affordability test doesn’t typically present itself as an issue for most individuals looking to buy a home. This is especially so in light of the fact that tenants often pay more in rent than they would for a comparable mortgage.

People who are looking to purchase a home right now are more likely to be affected by the loan-to-income ratio when applying for a mortgage. The loan-to-income ratio is where most lenders will only lend up to 4.5 times your salary, and that is the most amount most individuals can acquire, regardless of whether they pass affordability criteria or not.

Saving for a down payment during a period of high living costs and the restrictions of the LTI ratio will continue to be major obstacles for first-time homebuyers, even with the relaxation of mortgage borrowing laws.

How much can I borrow on a mortgage based on my annual salary?

You can usually borrow between four and four and a half times your annual salary per person. Certain factors, like a large down payment or a high family income, may allow you to negotiate a higher mortgage rate.