The Bank of England’s Financial Stability Report produced by the FPC said interest rates had increased since the requirement to apply the stress test was removed last June
The withdrawal of the affordability test recommendation (ATR) has resulted in a small rise in borrower access to the mortgage market, the Bank of England noted.
The Bank of England’s Financial Stability Report produced by the Financial Policy Committee (FPC) said interest rates had increased since the requirement to apply the stress test was removed last June.
It went on to say the withdrawal enabled households to borrow bigger amounts than before the ATR was in place, as the Financial Policy Committee expected. It also said as the base rate increased, it allowed borrowers who would have otherwise not been able to get a mortgage to be approved.
Its assessment suggested that the reduced buffer let households borrow more on average.
The FPC’s loan data found that the withdrawal had resulted in a 2% to 4% rise in loan sizes. It said the ATR removal offset the drop in loan sizes which was a result of higher rates.
Further analysis showed that until the end of 2022, the stress test removed increased total mortgage approvals by 1%. As the base rate increased, this rose to an estimated 1% to 5% by August this year. The Financial Policy Committee said this equated to less than 0.5% of the current mortgage stock, which was small compared to the 44% decline in approvals seen since it was withdrawn.
The FPC said the withdrawal on the affordability test recommendation also limited how much lender’s increased the stress buffer applied to reversion rates such as the SVR.
Between August 2022 and September 2023, the average SVR rose from 4.4% to 7.8% as lenders passed the base rate rises onto borrowers.
While this raised lender stress rates, the removal of the affordability test recommendation meant the increase was smaller, the FPC said.
Insight from lenders indicates that stress buffers above reversion rates dropped from nearly 3% at the time the ATR was removed to 1% by 2023. By September this year, the median stress rate applied to new loans was 8.8%. The Financial Policy Committee said if the ATR was still in place, this would have reached around 11%.
The FPC said the withdrawal of the ATR had a limited impact on the resilience of borrowers, which was expected.