The Bank of England has announced proposals for a significant change in mortgage lending rules, designed to help bridge the gap for First Time Buyers to get on the first rung of the property ladder.
The Bank is considering removing the requirement of all lenders that borrowers must be able to afford a rate hike of 3% before approving a mortgage, which has become more of a stumbling block amid rocketing house prices post-lockdown.
“We don’t regard it as a relaxation of the rules, rather as an efficiency point” said Andrew Bailey, Bank of England Governor. “Having now got a body of evidence running back seven years or so now, we were able to take a much more substantial judgment on the effectiveness of the tests.”
The announcement came during publication of the Bank’s latest Financial Stability Report, in which Bailey concluded that the UK is well equipped and braced for any potential economic downturn as a result of new variations of COVID-19.
Further measures set to be introduced include the limiting on some borrowing to 4.5x a borrower’s income, alongside a new set of FCA introduced affordability criteria, which the Bank suggest, is sufficient protection against excessive risks in the mortgage market.
“It isn’t surprising that something has had to change in the area of affordability” says Andy McBride, director of Professional Contractor Mortgages. “With house price inflation over the last 12 months, affordability has been the single biggest issue for many people when trying to get on the property ladder, and we welcome the changes introduced to combat that.”
“While the theory is good, it does remain to be seen what the new process will look like in reality. Affordability has been a hot topic in the industry since the Mortgage Market Review of 2014, and these changes are long overdue if we are to avoid future generations being priced out of joining the property ladder.”
The biggest impact will be felt at higher loan-to-value lending in the market, typically aimed at First Time Buyers. This area of lending has always seen the greatest consequence of stress-testing, with there generally being less surplus income available after the mortgage.
The news will also come as welcome news, however, to the nations Contractors, who thanks to the work of specialist brokers such as Cleerly, are able to unlock their true borrowing potential using their contract rate.
“Generally speaking our clients aren’t in the situation whereby affordability has been a preventative measure, as much as it adding a dose of realism when looking at sensible lending sums” continues McBride, who has worked in the contractor space for more than a decade. “Affordability has generally meant that very rarely are contractors able to truly maximise their borrowing potential, even with vast amounts of surplus income based on increasing contract rates this year.”
“These changes, however, will hugely benefit those looking to buy in the first quarter of 2022, as it will mean that affordability checks are no longer a concern provided your broker has done their job properly. The story could be very different if using a non-specialist broker, however, as the impact of incorrectly assessing affordability using restricted loan to income ratios could be the death knell in a purchase.”
“Consult a specialist without delay to ensure you have the best options available on the table.”