By Huw Jones
LONDON, Dec 11 (Reuters) - 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.
(Reporting by Huw Jones
Editing by Mark Heinrich)