Lenders will soon no longer be required to check whether mortgage applicants could afford payments at higher interest rates, as a change to lending rules announced last month prepares to come into effect.

On June 20, the Bank of England confirmed its intention to ditch the so-called mortgage stress test that has been in place since 2014. This means that from August 1, banks and building societies will no longer be required to assess whether a borrower could still afford their loan at the end of any short-term special offer period.

This affordability test was designed to ensure that borrowers did not assume debt they could not pay back. Its introduction was a response to the 2007-2008 financial crash which followed a period of more liberal lending practices.

However, some industry figures have long since claimed that the test is too strict on potential borrowers who would otherwise be good mortgage candidates. The Bank of England started consulting on changes to the rules in February, before announcing that this particular criteria would be scrapped in June.

A statement confirming the change said the test was introduced "to guard against a loosening in mortgage underwriting standards and a material increase in household indebtedness", both of which are considered a risk to economic stability.

However, a review by the Financial Policy Committee published in December last year confirmed that other rules were “likely to play a stronger role” in guarding against these concerns.

One such rule is what's known as the loan to income (LTI) flow limit, decides how much an applicant can borrow relative to their annual income. This limit - typically 4.5 times yearly salary - will remain once the affordability test is scrapped.

Thousands of potential homebuyers may find it easier to get on to the property ladder after a key mortgage affordability test was scrapped by the Bank of England.

The central bank has said the change – taking effect from 1 August – should not be viewed as “a relaxation of the rules”. However, some commentators said that while the move would be welcomed by many, there was a risk that some people would take out mortgages they were unable to afford.

The Bank has removed a requirement that forced borrowers to be able to afford a three-percentage-point rise in interest rates before they could be approved for a home loan.

This “stress test” was introduced in 2014, after the 2007-08 financial crisis, and was part of a package of measures designed to prevent a repeat of the reckless lending that some say was rife in the run-up to the crash.

The Bank has said another rule that is staying in place – which limits most new mortgage lending to a maximum of 4.5 times a borrower’s income – as well as separate affordability criteria set by the Financial Conduct Authority, “ought to deliver the appropriate level of resilience to the UK financial system, but in a simpler, more predictable and more proportionate way”.

The Bank has previously indicated that about 6% of mortgage borrowers – approximately 35,000 people – would have been able to secure a bigger home loan if the interest rate stress test had not been in place.

Claire Flynn, a mortgages expert at the comparison website Money.co.uk, said given the cost of living crisis, the removal of the affordability test was likely to be viewed by many as good news.

She added: “That’s because it could allow more people to get on the ladder as they can take out larger mortgages. However, borrowers will still need to meet the loan-to-income ratio, which could still prevent some from getting the mortgage they require to buy a home.

“There is also a risk that with fewer restrictions, some buyers will take out loans that they are unable to afford.”

Myron Jobson, a senior personal finance analyst at the website Interactive Investor, said unwinding the measure amid the cost of living crisis “could run the risk of people biting off more than they [can] chew financially to purchase a property”.

Banks and building societies look at various aspects of people’s finances when deciding how big a mortgage they think someone can afford to take out, and traditionally the typical maximum for how much an individual can borrow is 4.5 times their annual income. This is commonly known as the income multiple.

Banks can offer higher income multiples, but only on a set proportion of their lending.

With house prices having risen sharply, Halifax and Barclays are among the lenders that have been going up to 5.5 times income for high-earning borrowers, while the mortgage lender Habito will go up to seven times salary in some cases.

Rental Yields Drop Again Q2

But lender thinks yields will “stay pretty constant” as supply-demand imbalance exists.

The latest data from Fleet Mortgages has shown a drop in annual rental yields across England and Wales, but the buy-to-let specialist lender believes strong tenant demand – coupled with a relatively low level of supply – will likely keep yields at good levels.

Fleet Mortgages’ latest iteration of its Buy-to-Let Rental Barometer covering the second quarter of 2022 has revealed a slight fall in annual rental yields, down from 6.1% a year ago to 5.5%. However, the drop is only 0.2% on the previous three-month period, when the yield was 5.7%.

The yearly trend across all regions was down with every area of England and Wales seeing a drop in rental yields of between 0.1% and 0.9%.

Nevertheless, a more recent quarterly comparison with Q1 2022 shows that two regions – Wales and the East Midlands – have seen rental yields increase, three regions – the North West, West Midlands, and the South West – have seen no change, with the other five regions showing drops of 0.6% and below.R

The North East of England has the top rental yield regional figure for the eighth consecutive quarter, although the yield did slip slightly from 8.7% in the last quarter to 8.3% now.

Wales saw a 0.6% quarterly increase in rental yield and the East Midlands moved up by 0.3%.

According to Fleet, all regions running at rental yield figures higher than the England and Wales average were doing so because of the ongoing strength of tenant demand in those areas compared to the level of supply available.

The lender said it was continuing to see this strength in key town and city centres, with hotspots such as Liverpool, Manchester, Sheffield, Bristol and Cardiff.

Fleet said that while rental yields had dropped off the recent highs of the last 12 months, it was apparent that the imbalance between high tenant demand and low supply of rental space, will likely keep the yields at good levels across most of the regions in which it lends.

“Properties are highly sought after, and rents are strong due to the scarcity value of quality homes. Our anticipation is that, in most regions of the UK, yields will stay pretty constant especially while this supply-demand imbalance is in place,” Steve Cox, chief commercial officer at Fleet Mortgages, commented.

Fleet said landlords were keen to add to portfolios having secured capital increases on existing properties over the last two years, and it anticipated a positive buy-to-let remortgage market throughout the rest of 2022.

“We know that many landlords would like to remortgage existing properties in order to fund new purchases, however there are two areas to consider here. First is the increase in buy-to-let mortgage product pricing which has been obvious in the last couple of months, and secondly is a lack of supply to purchase,” Cox explained.

“Both might well hold landlords back from acting right now, however we do anticipate that 2022 will see strong levels of remortgaging throughout the rest of the year, and as lenders get on top of their current service issues, we will see a return to stability and pricing for buy-to-let mortgages, although this might not be visible until the early part of next year.”

Fleet said it continues to anticipate that rates will rise further, particularly as lenders sought to manage resources and service levels in a highly competitive marketplace.

“This is, without doubt, a very interesting period for landlords, lenders, and the wider private rental sector, as we seek to marry up a number of ongoing issues which are all having an impact,” Steve Cox, chief commercial officer at Fleet Mortgages, commented.

“The positive news is that, as our Rental Barometer shows, yields are holding up well, and while we have seen a drop-off since the highs of last year, in general, there has been a consistency across most regions on a quarterly basis.” 

Cox added that for existing landlords, the rental yield figures remain a strong source of comfort.

“While we believe the level of demand for PRS properties will dip, there is likely to still be enough – especially compared to property choice – to ensure they maintain good levels throughout the rest of 2022,” he pointed out.