The Bank of England has said it may relax the rules surrounding the affordability of mortgages so that buyers will be able to apply for higher-value homes than they would normally be able to. This will allow people to financially stretch themselves in order to purchase property.
A consultation by the Bank of England has been arranged to discuss the changes that will be made to the affordability tests that lenders are using to assess potential buyers. This will inevitably lead to more borrowers being able to access larger mortgages. This consultation is a direct result of concerns that this will further drive up house inflation.
It is a fact that stringent affordability tests that don’t represent current borrowing conditions have prevented many first-time buyers from taking out a mortgage, which could be considerably cheaper than rental rates.
What changes will be made?
The rules that will be affected will be the affordability test and the loan-to-income limit, both recommendations established in 2014 by the Financial Authority Committee. These rules were created with the intention of preventing buyers from getting themselves into financial difficulty by taking out mortgages that they could not afford.
The rules provide limits on both loan-to-income ratios and affordability, which provides lenders with a “stress” interest rate so that they can assess buyers’ ability to keep up with mortgage repayments.
A loan-to-income ratio is the rate at which banks and lenders will calculate the size of the mortgage they will offer by using the buyers’ annual salary. This rate has been set at 4.5 times the annual salary since 2014.
The affordability test involves the buyer proving that they can afford to keep up with repayments should the interest rates increase by 3% above the standard variable rate of the lender.
Standard variable rate mortgages (SVRs) typically follow on from a fixed rate mortgage when the term has come to an end and are generally more expensive. Many buyers will switch to a new fixed mortgage deal to avoid an SVR mortgage.
Although these rules stopped many from accessing mortgages, only 6% (approximately 30,000 mortgages) of buyers were forced to accept lower-value loans.
The expectation is that the loan-to-income rule will remain as it currently is, but the affordability stress test will be relaxed. This will mean that the repayment amount will be based on predicted market interest rates over the coming 5 years, or an increase of 1% on the current rate, whichever is greater.
Mortgage technical manager at John Charcoal, Nicholas Mendes, commented: “The scrapping of current rules would be welcome by homeowners and brokers alike, as this would be a boost for the market given the ever-increasing property prices”.
‘This will give homeowners, at least in the short term, the ability to borrow more.’
Despite these rule changes, the ever-increasing cost of living could completely nullify the effects of the change, as household bills are on the rise, and lenders will need to factor this in when performing the affordability test.
‘We are expecting to see inflation continue to increase into 2023,’ added Mendes, ‘with multiple base rate rises, lenders could choose not to make any changes because predicting where rates could be in 5 years’ time seems almost impossible.
‘As the costs continue to escalate, we could see lenders exercise caution and start to consider other factors to ensure the mortgage remains affordable.’
Rising rates and escalating inflation have resulted in many lenders, including TSB, Santander, and Barclays, altering their affordability stress tests to reflect the current economic arena.
Mortgage consultant at Private Finance, Chris Sykes, said: ‘We can expect more lenders to take these costs into consideration moving forward, especially after the removal of the energy price cap in April.
‘This means we can expect tighter affordability for some and lower loan amounts available than was previously the case.
‘This could reduce people’s maximum borrowing, which in turn could be a problem for those already in a tight situation.
‘We are already seeing the impact these changes are having on Barclays, with a recent client able to borrow a very significant £100,000 less following the implementation of the changes to their affordability calculator.’
This could present problems, not only for first-time buyers but also for people looking to remortgage their property. It will prevent many owners from being able to remortgage their homes, forcing them to remain on more expensive monthly repayments.
In addition, the increased price of the average home will further contribute to the difficulties first-time buyers are having trying to get a foot on the property ladder.