Getting approved for a mortgage may become easier for some borrowers, as the Bank of England will no longer require lenders to take a “stress” test of affordability.
The central bank test required lenders to calculate whether borrowers would still be able to afford their monthly payments if interest rates rose 3 percent above their providers’ standard variable rate (SVR).
In June, the average SVR reached a 13-year high of 4.91 percent, according to Moneyfacts, after rising 0.51 percent since December 2021.
This means that the financing of borrowers has been effectively tested against mortgage rates of around 8 percent.
Stress test canceled: Bank of England relaxed rules on mortgage affordability, but lenders are not expected to overhaul their borrowing standards
The test was introduced in the aftermath of the global financial crisis to prevent banks and lenders from building up loan books with a high risk of default.
SVRs are the “default” rates that borrowers switch to when fixed-term deals expire and are usually very expensive.
Hence the majority of borrowers switch to a new fixed mortgage deal and do not end up with their lenders standard variable rate.
Those trying to get to or up the real estate ladder may hope that removing the test means they are more likely to be approved for a mortgage.
However, banks and building firms can still choose to keep the test – or something similar to it – in place, despite the change in policy from the BoE.
Other borrowing restrictions remain. Most major lenders don’t allow buyers to borrow more than 4.5 times their annual income, for example, though some can go up a little depending on the circumstances.
Ben Tadd, principal at Lucra Mortgages, said: “Cancelling affordability tests, as of today, does little to help people borrow more money to buy a home.
It’s certainly a small step in the right direction, but the larger problem of a loan restricted to multiple income ceilings needs to be resolved.
It theoretically expands marginally the pool of people now eligible for a new mortgage, but certainly at least for first-time buyers, it still isn’t enough to help those trying to buy their first home.
Individual lenders have not yet disclosed what, if any, actions they will take.
So far, lenders have been silent about any potential changes, said Chris Sykes, technical director at mortgage expert Private Finance.
Once a lender announces a revised policy on stress tests, he says, others are likely to follow.
“Often when a domino falls, others follow suit, precedence is set, so if anything happens, the bank can say, ‘Well, that’s how every lender does it,'” he said.
The FCA’s Mortgage Lending Rules still require lenders to make a broad assessment of affordability before approving a loan.
As inflation continues to rise and household costs such as energy bills increase, it is becoming increasingly difficult for many first time buyers to save up for a deposit.
Lenders are showing caution amid the cost of living crisis
With mortgage rates currently rising thanks to increasing inflation, some mortgage brokers say lenders may be reluctant to ease their affordability checks.
Ray Bolger, Chief Technical Director of Mortgage at John Charcol, said: The biggest risk to the market is the large and rapid increase in mortgage costs, because people are used to bank interest rates at such extremely low levels.
“I think most lenders are going to want to apply a test that’s still close to 3 percent so rates seem close to peaking.”
When assessing potential borrowers’ finances, most lenders use NSO data to estimate the average monthly cost for things like bills and food.
These costs have been rising lately, and banks have been factoring this into their affordability calculations, making it more difficult to get approval.
James Miles, mortgage advisor at The Mortgage Quarter, said banks could use this additional flexibility to offset the impact on mortgage applications of Ofgem’s energy price cap in October.
“We hope some lenders will use this flexibility by the BoE to offset some of the increased costs and become more flexible with affordability again – while continuing to take a responsible approach to lending of course,” he said.
“The biggest concern is the ever-increasing cost of living which will reduce how much first time buyers can borrow as most lenders use ONS numbers to calculate disposable income.”
The average property now costs nearly nine times the usual salary, with the affordability of house prices in England reaching the worst level ever recorded by the Office for National Statistics.
Best mortgage rates and how to find them
Mortgage rates skyrocketed as the Bank of England’s base rate rose rapidly.
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