Mortgage affordability rules are being loosened in a bid to help more first-time buyers onto the ladder but there is widespread scepticism over whether the move will have the desired effect.
The Bank of England (BoE) announced this morning it would be withdrawing a ‘mortgage market affordability test’ with effect from 1 August.
This recommendation for lenders was put in place in 2014 to ensure prospective borrowers can repay their mortgage. It means, when assessing a mortgage applicant, lenders should look at whether a borrower could afford the mortgage if the rate was 3% higher.
Under the change announced today this test will be withdrawn. However, a second ‘test’ put in place at the same time which requires borrowers to earnings to be at or greater than 4.5 times their income will remain.
What does the loosening of rules mean for borrowers?
The tests were introduced following a massive review of mortgage lending following the 2008 financial crash. With so many people falling into debt as a result of taking out mortgages they couldn’t afford it was deemed responsible for lenders to use the stricter affordability assessments to ensure households were less likely to fall into debt through an inability to pay the mortgage.
The downside of this was many first-time buyers with low deposits have been effectively prevented from getting on the property ladder because the tests limit how much they can borrow.
So, in theory, the move by the BoE today should take away one of the barriers they faced. But experts are not sure the removal of this test alone will solve the problem.
And Gemma Harle, managing director at Quilter Financial Planning, thought now was not a good time to loosen affordability rules.
“With interest rates starting to creep up to meet the damaging impact of inflation and soaring energy and food prices you would think that people’s ability to afford their mortgage should really be under the spotlight now,” she said.
“However, this move by the Bank of England may illustrate that the long-term health of the housing market is predicted to be less than rosy, and this change is a means to guard against a real slump in house prices.”
She said the rule change may not be as ‘significant’ as it sounded because there were still boundaries in place as to how much people must earn to be approved for a mortgage, and these were more effective in limiting how much people could borrow.
Soaring house prices
Gemma also explained that due to high house prices, first-time buyers needed very sizable deposits and in the current financial environment saving this type of money would be very difficult due to increasing rents and the cost of living.
What’s more, high inflation will mean their savings were not as valuable and house prices have become further and further out of reach for prospective buyers.
As such, the change in the affordability rules could perpetuate unsustainable further growth because it may heighten demand in a market which is already suffering with limited supply.
Gemma added: “Ultimately, one of the key strategies the government should adopt to help first-time buyers onto the ladder is simply to build more stock.
“This has a natural effect of stabilising house prices and bringing them down due to the laws of supply and demand. This will be the only way of really helping the masses get onto the housing ladder.”
