More people could take their first step on the property ladder if proposals to loosen mortgage affordability rules are given the go ahead.
The Bank of England wants to axe a restriction put in place in 2014 which means borrowers will only be accepted for a mortgage if they can prove they would still be able to afford the repayments if the product’s interest rate increased by 3% above the reversion rate. This is the rate your mortgage automatically switches to at the end of your initial deal.
So, currently, when calculating how much money a potential homeowner can borrow using a mortgage, lenders multiply their salary by 4.5.
Then, on top of this, they also apply the test enforced by the Financial Policy Committee (FPC) which assesses whether the borrower or borrowers in question could cope financially if the mortgage rate were to rise by 3% above the reversion rate.
However, the Bank of England believes this test is not fair and, without it, there is still enough protection in place for borrowers to avoid getting into financial trouble.
Benefits and risks
It the proposals are given the go ahead it could mean more people can become homeowners. Currently, many potential buyers are limited on what they can buy because of rising house prices.
However, experts have highlighted these proposals are not without risk
Kevin Roberts, director, Legal & General Mortgage Club explained: “The move is likely to find overwhelming support from would-be buyers already facing record house prices, however there is a risk some overstretch themselves and if house prices fall, find themselves in negative equity.”
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, agreed. But she explained, there were still enough rules in place to help offset this risk.
She said: “The Bank [of England] calculates that a combination of the FCA’s affordability rules and its own rule that limits the number of mortgages with a high loan-to-income will offer enough protection.
“The Bank has also calculated that it’s not going to open the floodgates to huge numbers of new buyers, pushing prices so high that it undoes any benefit from making it easier to borrow.”
The consultation is now underway and is due to finish on 6 May.
The rent being paid by many tenants is in excess of what many pay as mortgage payments so if anything can be done to help these people become homeowners it is to be encouraged.
The media destroyed self cert as they misrepresented it and this was the best way for many self employed to buy a home because the lenders use net profit for self employed as opposed to gross income for the employed person,
a huge difference.