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FPC recommends stress test against 3% base rate hike

The Bank of England has recommended lenders stress test borrowers’ affordability against a 3 per cent increase in base rate.

In today’s financial stability report, Bank of England governor Mark Carney once again says the housing market poses the biggest current risk to financial stability and the “durability” of economic expansion in the UK.

Carney says: “The FPC is today introducing a new affordability test for borrowers in the event of a three per cent increase in the Bank of England base rate.

“History shows that the British people do everything they can to pay off their mortgages. We want to ensure the continued durability of the current expansion and that includes testing against every eventuality.”

The committee has also recommended a cap on the number of high loan-to-income mortgages to 15 per cent of all new lending.

As part of the Mortgage Market Review regulatory changes, lenders have to stress test borrowers taking out mortgages with a lock-in period of less than five years against their existing SVR plus an additional percentage. The FCA proposed using the five-year forward sterling rate.

The FCA also announced in March that lenders will have to take into account any recommendations from the FPC on stress testing, such as the measures announced today.

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