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Bank of England demands tighter affordability calculation

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27/06/2017
Bank of England demands tighter affordability calculation

The Bank of England now wants lenders to ensure that borrowers could afford their mortgage if the ‘reversion rate’, often their standard variable rate (SVR), were to rise by 3% over five years.

This builds on the recommendation made in 2014, when the Bank said all mortgage lenders should assess whether borrowers could still afford their mortgages if Bank Base Rate were to increase by 3% during the first five years of the loan.

Bank Base Rate is currently set at a record low of 0.25%. In contrast, the average SVR is more than 4%.

However, the maths is not that straightforward. When Bank Base Rate increases, SVRs tend to increase roughly in line, so the models lenders have built to assess affordability will usually take this into account.

As a result, the Bank of England does not expect the change in wording to have a significant impact on the market. It found the average stress rate in quarter four 2016 to be 6.8%, and predicts this would have been 7% under the revised recommendation. Had the new wording been in place last year, it would have reduced mortgage approvals by less than 0.5%.

 

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