A recent change to mortgage rules that required lenders to check whether homeowners could afford repayments at higher interest rates has been scrapped, potentially meaning some people will be able to borrow more money to buy their homes.
The Financial Policy Committee (FPC) made two recommendations in 2014 to guard against a relaxation of mortgage underwriting standards. However, the FPC reviews these recommendations on a regular basis, and in its latest review, the Committee noted some concerns about the operation of the affordability test. .
In particular, the stress rate encapsulated in the test remained broadly static, reflecting the rigidity of reversion rates despite the decline in average quoted mortgage rates. This has led to considerable uncertainty about how the rate of stress encapsulated in the affordability test might change in the future, and in turn what effect the test might have.
Why the change?
The Mortgage Market Affordability Test was originally introduced and designed to avoid making any economic downturn worse or jeopardizing financial stability if interest rates suddenly accelerate.
However, the central bank is abandoning the test after ruling that other measures, including regulations that limit the amount of a mortgage loan based on borrowers’ income, are ‘likely to play a bigger role’ in controlling of household debt.
The Bank of England added that further rules “should provide an appropriate level of resilience to the UK financial system, but in a simpler, more predictable and more proportionate way”.
This is the result after the bank raised interest rates for the fifth consecutive time to 1.25% last week as part of efforts to fight soaring inflation, which will in turn mean that many borrowers are paying higher interest rates on their mortgage payments.
Doubtful movement or a step in the right direction?
The bank is now arguing that a loan-to-income stream (LTI) limit on the number of home loans that can be granted above 4.5 times income and the Financial Conduct Authority’s lending rules should guard against risky loans.
Still, Gemma Harle, managing director of Quilter Financial Planning, said the move was “puzzling” given the current rise in interest rates and soaring inflation.
She said: “With interest rates starting to rise to cope with the adverse impact of inflation and soaring energy and food prices, one would think that people’s ability to pay their mortgage should really be in the spotlight now.”
“However, this move by the Bank of England may illustrate that the long-term health of the housing market should be less than rosy, and this change is a way to guard against a real fall in property prices.”
“While this is potentially a bad time for the announcement, the change in accessibility rules may not be as significant as it seems because the LTI “stream limit” will not be removed, which has a much greater impact on people’s ability to borrow.”
Harle said the rule change is one of many attempts to help first-time buyers get on the ladder, but could end up having the opposite effect as more people could apply for mortgages for an already limited stock.
She added: “At the end of the day, one of the key strategies the government should adopt to help first-time buyers get on the ladder is simply to build up more stock. This has the natural effect of stabilizing property prices and lowering them due to the laws of supply and demand. This will be the only way to truly help the masses get on the housing ladder.
Commentators also noted that while some may find the change confusing given the rate hikes, the risks to the economy as a whole are relatively low given the other safeguards put in place by the Bank of England.
It could also mean that borrowers who don’t meet other affordability criteria might be able to take out bigger mortgages, especially as the cost-of-living crisis eats away at their purchasing power.