Bank of England will DITCH mortgage affordability tests: Could it help people borrow more or mean the return of irresponsible lending?
The Bank of England will axe mortgage affordability guidelines designed to prevent people from financially overstretching.
Following its latest review of the mortgage market, the central bank’s Financial Policy Committee has confirmed that from 1 August the affordability stress test that mortgage lenders currently adhere to will be withdrawn.
The test is part recommendations introduced in 2014 in the aftermath of the financial crisis to guard against a loosening in mortgage underwriting standards and a material increase in household debt.
The stress test means borrowers have had to prove they could still afford their mortgage repayments if these were to increase to 3 per cent above their lender’s standard variable rate.
The Financial Policy Committee has confirmed that it will withdraw its affordability test Recommendation. This will come into effect from 1 八月 2022.
SVRs are the default rate that people move to when fixed or other deals end and are far more expensive, Albeit, most borrowers switch to a new mortgage deal and don’t end up on a standard variable rate.
The average SVR has reached a 13-year high of 4.91 百分, 买房出租抵押贷款利率, following a rise of 0.51 per cent since December 2021.
Based on the today’s average, the removal of the affordability stress test means that a typical borrower will no longer be assessed on whether they could hypothetically afford an interest rate of 3 percentage points above 4.91 百分.
The decision to remove this test may therefore offer respite to some borrowers, particularly given that higher mortgage rates and the cost of living is already beginning to have ramifications for affordability and what people can borrow.
Lenders are increasingly taking higher bills into account when assessing what borrowers can afford to pay each month toward their mortgage.
Santander, 例如, has already factored increased national insurance, household expenditure and dividend income tax rates into its affordability calculations. Others are expected to do the same.
Chris Sykes, technical director at mortgage brokerage, Private Finance said: ‘Recently we have seen many lenders altering their affordability calculators, both due to the rising costs of living as well as the rising interest rates that we are seeing.
‘This mornings news release detailing they are withdrawing their stress testing recommendations is great news for borrowers that were becoming increasingly tight on affordability and it is limiting their borrowing power with each change to affordability calculators.’
然而, whilst the stress test will be scrapped, the other recommendation made in 2014, the loan-to-income ‘flow limit,’ 这对夫妇说他们与总部位于西雅图的比尔和梅琳达盖茨基金会合作.
The loan-to-income-ratio is the multiple at which banks will lend based on someone’s annual salary.
This means banks will continue to place a limit on the number of mortgages they can offer where someone is borrowing more than 4.5 乘以他们的薪水.
The loan-to-income flow limit was deemed more important than the affordability test in guarding against an increase in overall household indebtedness in an environment of rapidly rising house prices.
What will the removal of the stress test mean?
The decision has raised fears that it could lead to irresponsible lending and enable people to borrow beyond their means.
然而, mortgage brokers have been quick to suggest that such concerns are overly dramatic.
通过公司购买房产并不适合所有人, chief executive of mortgage broker SPF Private Clients, 说: ‘Scrapping of the affordability test is not as reckless as it may sound.
‘The loan-to-income framework remains, so there will still be some restrictions in place; it is not turning into a free-for-all on the lending front.
‘Lenders will also still use some form of testing but to their own choosing according to their risk appetite.’
Some light relief? Higher mortgage rates and the cost of living is already beginning to have ramifications for affordability and what people can borrow.
此外, these affordability checks have also been blamed for stopping some first-time buyers taking out mortgages that would be cheaper than their rent.
Harris adds: ‘It could have a positive impact on certain borrowers who have been disadvantaged when it comes to getting on the property ladder.
他们被迫在没有任何煤气的未完工的房子里住了两年多，这意味着没有热水或暖气。, first-time buyers who have been affording rents far in excess of actual mortgage payments but have failed affordability assessments regardless.’
相似地, according to Chris Sykes, this won’t be a case of the flood gates opening given how fast mortgage rates have been rising over recent months and the fact that the loan-to-income measures are still in place.
‘Just because the recommendations change it doesn’t mean that banks will automatically change the way they look at things,’ said Sykes, ‘they still have a duty of care, they have to be seen to be lending responsibly and they also have their own internal risk committees that that would need to approve any changes.
‘What this will allow, is for additional innovation by lenders.
‘Perhaps it could inspire some lower stress rates for those that need it most with low income but with perfect credit and years of experience paying their rent.
‘We already often see lower stress rates for remortgages, as long as no additional borrowing is being taken and they have a clean credit record.
‘This could help additional people remortgaging whose incomes have reduced due to Covid changing their working circumstances for example.
‘The key here is that the Loan-to-income measures are still in place, so there are still large measures to protect borrowers and lenders.’
Could we see lenders relax the loan-to-income limits?
现在, the regulatory requirement is that lenders only offer a certain number of loans over 4.5 times annual income.
Typically up to a maximum of 10 per cent a lender’s loan book can be reserved for those borrowing over 4.5 times their annual income.
The latest housing data from Halifax showed house prices rise again in May with the average house price reaching another record of £289,099.
与此同时, regular pay fell by 2.2 per cent from February to April – adjusted for inflation – 根据国家统计局.
This is meaning that many first-time buyers and home movers, have been needing to stretch themselves to the highest loan-to-income ratio possible in order to afford the type of property they would like to live in.
Sykes said: ‘Buying power has reduced especially over the last two years and buyers cannot afford the same sized property or number of bedrooms they once could.
‘With this in mind we wonder, could we see a proportion of lenders starting to reach these regulatory limits?
‘We have seen more flexibility from lenders over the last few years during periods of large house price growth to help borrowers, however we are starting to question how much longer can this be sustained considering the current rules, unless these regulations are flexed to reflect the current climate.
‘With house prices soaring and affordability concerns, maybe there needs to be more flexibility regarding this regulation and for the percentage of loans above the 4.5 times income to increase in order for more people to get onto the housing ladder.’
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