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Mortgage affordability rule to be dropped

Mortgage application form with a calculator and a pen

Changes announced by the Bank of England could make it easier for first-time buyers to get a mortgage.

From August, lenders will no longer be required to check whether borrowers could still afford their loan at higher interest rates.

Introduced after the last financial crisis, the mortgage affordability "stress test" was designed to help ensure that borrowers would be able to continue to make their mortgage repayments if interest rates went up.

Lenders did this by applying the standard variable rate or tracker rate that borrowers would move on to at the end of any short-term offer period, plus three percentage points.

Some in the industry believe that this test was too onerous and excluded some borrowers who could afford a mortgage. For example, there are would-be buyers who have been refused mortgages at lower repayments than the amount they pay in rent each month.

"Barely a week goes by without seeing a viral tweet by someone who is paying £1,000 in rent but has been told by the bank that they can't afford a £600 mortgage," Dan Wilson Craw, deputy director of campaign group Generation Rent, told the Guardian.

"It's a significant part of the housing crisis and is partially caused by this requirement on lenders to test affordability on an assumption that future interest rates will be much higher than they are today."

The easing of the rules is not expected to lead to a mortgage free-for-all.

Banks and building societies will still carry out other checks to make sure that borrowers will not be stretched beyond their financial limits.

Also, lenders will still be restricted on how many mortgages they can provide above 4.5 times salary. This caps mortgage borrowing depending on the borrower's income, thereby limiting the amount of mortgage debt they can take on. With house prices climbing ever higher, this rule has had more of an impact on first-time buyers than the affordability test.

Lawrence Bowles, director of research at Savills, told City A.M. that the change in the rules "should allow lenders to be slightly more flexible which will come as welcome relief to some would-be buyers struggling to keep up with current criteria because of significant price growth of the past two years".

Bowles added, however, that saving for a deposit will remain the most significant barrier to home ownership.

The latest monthly figures from Nationwide show a modest slowing of annual house price growth to 10.7% in June, from 11.2% in May. The price of a typical UK home reached a new record high of £271,613, with average prices increasing by over £26,000 in the past year.

Separate figures from the Bank of England reveal that mortgage lending in May rose to the highest level since September last year. Net mortgage lending increased by £7.4bn, with lenders approving 66,163 home loans.

Posted by Fidelius on July 4th 2022

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