A mortgage affordability test (or check) is a process used by lenders in the UK to determine how much money they will lend to a prospective homebuyer. This check was introduced following the Mortgage Market Review (MMR) in 2014 by the Financial Conduct Authority (FCA), with the aim of ensuring that borrowers can afford their mortgages both now and in the foreseeable future.
The check requires lenders to consider not just the applicant’s income, but also their regular outgoings, including debts, bills, living costs, and other commitments. This gives a more complete picture of the borrower’s financial situation and their ability to repay the mortgage. It should help prevent borrowers from taking on more debt than they can afford to repay by limiting the amount they can borrow based on their individual financial situation, rather than just on the property’s value.
Each lender will have their own rules about affordability. However, the FCA’s Mortgage Code of Business states that a lender must “put in a place, and operate in accordance with, a written policy … setting out the factors it will take into account in assessing a customers ability to pay the sums due”. This rule should ensure that decisions on lending are made in a fair and consistent manner. If you believe your lender has acted in a way that’s unfair you can speak to your local Citizens Advice about your options for redress.
It’s worth nothing that affordability checks don’t just protect borrowers – they also protect lenders. By ensuring that mortgages are only given to borrowers who can afford them, affordability checks help to limit the number of loans that go into arrears, which should reduce losses for the lender as well as future suffering for potential buyers.
Affordability checks also promote financial stability, by ensuring that borrowers can afford their mortgages. This reduces the risk of a housing market crash caused by widespread defaults on mortgage payments.
The Bank of England used to recommend that an interest rate stress test be performed as part of the affordability check. Strangely, In August 2022 (right before it started hiking interest rates), the Bank withdrew this recommendation. For more on the decision and the reasons behind this decision, see these articles from the Bank of England.
Withdrawal of the FPC’s affordability test Recommendation
An FPC Response – Consultation on withdrawal of the affordability test Recommendation