The Bank of England has confirmed it was tightening its mortgage affordability rules, which could make it even more difficult for borrowers to qualify for a loan.
In its latest Financial Stability Report the Bank said lenders will now be required to check that a borrower can pay back their loan at a rate of 3% above the standard variable rate.
Under the previous rule introduced in 2014, banks and building societies would test borrowers by checking how they would react to an increase of 3% above the base rate.
With the average standard variable rate above 4%, this means borrowers could have their affordability tested at a rate higher than 7%.
The Bank said: “Lending conditions in the mortgage market are becoming easier and competitive pressures in the market remain.
“So there is a risk that lenders loosen the standard at which they test affordability, especially if there is significant scope for interpretation of the policy.
“The new recommendation promotes consistency of implementation across lenders and insures against the risk of loosening underwriting standards.
“It also ensures that borrower affordability is tested in the event that the borrower is unable to refinance their mortgage at the end of the fixed-rate period, which is appropriate given that — in times of stress — some borrowers may be unable to do.”
The Bank also said it was raising the capital buffer on UK lenders amid concerns about the rapid growth of consumer borrowing.
The Bank told Britain’s lenders that they must set aside £11.4 billion of capital in the next 18 months to make them more resilient to the risk of rising consumer debt.
It said it would increase the counter cyclical capital buffer from 0% to 0.5% and suggested this will likely go up to 1% in November.
Bank of England governor Mark Carney said: “The resilience of the UK financial system has strengthened significantly since the crisis. As a result, it has demonstrated its ability to dampen, rather than amplify, the impact of shocks on the real economy.
“As the UK moves into a more standard risk environment and embarks on the Brexit process with its attendant tail risks, the FPC is committed to ensure that the system continues to have sufficient resilience to withstand potential shocks.
“By taking the measures announced today and overseeing contingency plans for Brexit, the FPC will help ensure that the people of the United Kingdom can move forward with confidence that they will be able to access the financial services they need in order to seize the opportunities ahead.”
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