Mortgage Affordability Rule Changes
As interest rates rise the Bank of England has also made changes to the rules relating to mortgage affordability.
Mortgage Market Review
Following on from the latest review of the mortgage market the Bank of England Financial Policy Committee has scrapped the mortgage affordability stress test recommendation. These changes came into effect from 1st August 2022.
What is Mortgage Affordability?
The mortgage affordability test was first introduced in 2014. The test was designed to assess prospective borrowers’ ability to repay their mortgage if their mortgage rate was to increase. The stress test meant borrowers had to prove they were still able to afford their mortgage repayments if mortgage rates were to increase by 3% over the lenders standard variable rate.
The decision followed on from a deliberation process which found that an estimate of 50,000 people were being kept off the property ladder because of these affordability requirements. The goal now is for mortgage lending to be simplified in order to help first-time buyers, those looking to remortgage and movers. [Statistic Source: Money to the Masses].
Mortgage Loan to Income Limits
The other recommendation made by the BoE, which will not be withdrawn, is keeping the loan to income (LTI) ‘flow limit’ in place. This limits the number of mortgages which can be extended to borrowers with a loan to income ratio at 4.5 or greater.
These recommendations were introduced to help guard against the issues of mortgage underwriting standards being relaxed and an increase in household debts, which could emphasise an economic downturn and as a result increase financial stability risks. By implementing these stipulations that the majority of loans on the market should be no higher than 4.5 times the annual income of sole or joint mortgage applications, it is hoped that the mortgage market will avoid a return to the pre-financial crisis lending levels.
Why is Mortgage Affordability being Scrapped?
The Bank of England (BoE) has made a decision to terminate the mortgage affordability rules and keep in place the current limits on loan to income rates. They announced that the existing limit on high loan-to-income ratio mortgages, alongside the other affordability requirements as set out by the Financial Conduct Authority (FCA) is enough to bridge concerns within the UK's financial system but actually in a much more predictable and simpler way.
As a result the move away from the mortgage affordability test could see competition rise between lenders. The removal of this restriction could also soften potential house price slumps for homeowners. In this challenging phase of the market we could see further support from lender's as the impact of them choosing to approve mortgages more cautiously could lessen.
How Much can you Borrow?
Would you like to find out how much you can borrow? Whether you are looking to remortgage your current property, move or buy your first home, Transparent Mortgage Services can help. We search the entire UK mortgage market of lenders to find you the right mortgage to meet your needs and offers the most competitive rates.
If you would like to find out more information or to discuss your options please get in touch with our specialist team of mortgage brokers at Transparent Mortgage Services today. Call us on 01424 444 597 or email us at info@tms-fs.co.uk
