The Bank of England said on Friday it would review the test that borrowers must pass if they want a mortgage, raising the prospect of obtaining home loans more easily.
The BoE introduced a tougher “affordability” test in 2014 to ensure that borrowers do not become a threat to financial stability by taking on debt they cannot afford to repay if interest rates were to rise by 3 percentage points.
The assumption of such a jump in rates has now become more questionable due to the very low BoE base rates and a global fall in borrowing costs.
The BoE test sets limits on how high the loan can be in relation to a person’s income. Banks have already been reining in high-loan-to-income mortgages since the economy began coming under pressure due to COVID-19.
The BoE’s Financial Policy Committee said it would review how the test is calibrated and report its conclusions next year.
It will take into account that the so-called reversion rate, the typically higher interest rate borrowers pay after an initial period, is now far lower than in the past.
Few economists see rates going back to “normal” levels anytime soon.
“Consistent with these factors, the option-implied distribution of future interest rates suggests a lower probability of a 300 basis points rise than in 2014,” the FPC said.
“This suggests that households’ capacity to service debt is more likely to be supported by a prolonged period of lower interest rates than it was in 2014,” it added.
The calibration of the affordability test also seeks to ensure that households overall can better withstand changes in income and employment.
The FPC said a prior review last year found no evidence that the test in its current form was having a material impact on the availability of home loans.