What impact are the Financial Policy Committee’s mortgage tools having on prospective first time buyers?

The purpose of Bank Overground is to share our internal analysis. Each bite-sized post summarises a piece of analysis that supported a policy or operational decision.
Published on 20 May 2021
Analysis of household-level data suggests that the Financial Policy Committee’s (FPC’s) mortgage market Recommendations might be constraining 2% of all renters from purchasing the median-priced first-time buyer property in their region.

We estimate that for 75% of all renters, the range of properties they can buy is limited by the amount they have saved. The remaining 25% of renters could potentially see their options limited by their income under the FPC’s affordability test. Under the affordability test, a borrower must have enough income to afford their mortgage repayments even if interest rates rise by 3% above their contractual reversion rate.

To analyse the impact of the affordability test on potential first-time buyers, we estimated the largest loans renters could afford with and without it in place. In the absence of the affordability test, borrowers would still need to pass minimum affordability requirements.

The FPC’s affordability test limits some borrowers to smaller loans (Chart A). This means that a smaller range of properties will be within reach for these borrowers because of the affordability test.

Chart A: Financial Policy Committee rules only marginally reduce the maximum loan available

Maximum loan amounts under FPC and Financial Conduct Authority (minimum affordability test) rules

Density plot showing maximum mortgage available to renters under FPC rules and minimum affordability test rules.


  • Sources: Wealth and Assets Survey (ONS) and Bank calculations.

To illustrate the impact of this, we estimated the share of renters who could afford the median-priced first-time buyer property in their region with and without the affordability test in place.

With the affordability test in place, 9% of all renters can afford the median-priced first-time home in their region, based on their current income and savings. Even if the FPC rules were not in place, and borrowers only had to satisfy minimum affordability requirements, then 11% of renters would be able to afford the median-priced first-time home in their region. This suggests around 2% of renters might be able to afford the median-priced first-time home in their region if they could borrow more than the affordability test currently allows.

This does not mean these renters are locked out of the housing market altogether. They could raise a larger deposit or take out a smaller mortgage on a less expensive property, consistent with the FPC’s intention to limit the number of highly indebted households.

This post has been prepared with the help of Lisa Panigrahi and Simon Pittaway.

This analysis was presented to the FPC in December 2020.

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