Mortgage Affordability Stress Test Scrapped.
This isn’t the only action the Government has recently taken that will affect homebuyers; they also increased interest rates six times since December to try and combat inflation. They most recently hiked up the base rate by 50 basis points to 1.75%.
So what could this mean for potential homeowners?
What Has Changed?
Lenders have until now ‘stress tested’ your ability to keep up with payments if interest rates were to rise.
However, from August 1 2022, the Bank removed a requirement that previously asked borrowers to be able to afford a 3% rise in interest rates. This measure was introduced in the aftermath of the global financial crisis (2007-08) to try and make risky borrowing and reckless lending a thing of the past.
First introduced in 2014, the stress test was one of a series of measures implemented to prevent a repeat of the lead-up to the crisis, where irresponsible lending was widespread.
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Is This Good News?
This might be good news for many First Time Buyers or potential homeowners as it could help them to get on the property ladder. However some experts have pointed out the dangers of people again taking out mortgages they can’t afford.
However, the Bank has made clear that another rule remains; most new mortgages are limited to a maximum of 4.5 times a borrower’s income. Also, the Financial Conduct Authority sets separate affordability criteria. The Bank says this should perform the ‘appropriate level of resilience’ to the UK financial system. But, it also claims a ‘simpler, more predictable and more proportionate way’.
Many people could benefit from the change. The Bank of England suggested that in the past, approximately 6% of borrowers ( around 35,000 people) would have been able to obtain a larger home loan if not for the stress test.
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Who Will Benefit?
Some borrowers (such as First Time Buyers who have been renting at a cost higher than potential mortgage repayments) will benefit from this change. These people may have previously failed affordability assessments for being unable to prove they could afford an interest rate rise of 3%. The rule change could have a positive effect on many borrowers who have been disadvantaged when it comes to getting on the property ladder. It’s important to remember though, that there remain plenty of checks in place to ensure that borrowers don’t take on mortgages they can’t afford.
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Costs Still Remain…
With the LTI flow (loan to income) limit staying in place, the hurdle of saving a sufficient deposit remains. We mustn’t forget the additional costs that come with buying a property, like conveyancing fees.
Considering the average price for first-time buyers is around £236,780 (from the latest UK House Price Index), an average salary is £31,250, and assuming you can borrow 4.5 times that, this would require a deposit of £96,155. This means saving around 40 per cent of the property’s value.
While there are measures designed to support first-time buyers, these can come with downsides and limitations, such as a 25 per cent charge for any unauthorised withdrawals from a Lifetime ISA, or a requirement to purchase an eligible new build with a Help to Buy equity loan.
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