A major change for prospective home owners are coming into effect today. From Monday, August 1, affordability tests for mortgage borrowers have been scrapped by the Bank of England, despite interest rates continuing to rise.
Under the previous rules, mortgage borrowers had to prove they would be able to continue paying their loan if interest rates increased. The 'stress test' forced lenders to calculate whether potential borrowers would be able to cope if interest rates climbed by three percentage points above your loan reversion rate (the rate that applies when your fixed deal ends). Many borrowers who could not prove this were turned down for a loan, even if they could easily afford a mortgage at the existing rate.
But it was announced back in June that the Bank of England would be axing affordability tests from Monday, August 1, which some believe will make it easier for would-be homeowners to get loans. However, others have warned it will not make things any easier for most people trying to get a mortgage.
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Interest rates recently rose for the fifth time in a row - to 1.25% in June, according to the Mirror. Two mortgage recommendations were introduced in 2014 following the 2007/2008 financial crash to ensure borrowers didn’t take on more debt than they could afford, including the now-scrapped affordability test. The other measure, which remains in place, is the loan-to-income (LTI) 'flow limit' which limits the number of mortgages that can be extended to borrowers at LTI ratios at 4.5 times your income or greater.
While experts say some groups, such as the self-employed and those who work on a freelance basis, will be helped by the scrapping of stress tests, others say the continuation of measures like loan-to-income limits will still make it difficult for first-time buyers to get a mortgage.
With costs of living rising and inflation at a 40-year high in the UK, thousands of people are struggling to save enough for a deposit for a mortgage. Lenders still use your income to determine how much you can borrow, with most high street banks using 4 to 4.5 times your salary as the measure to decide how big of a mortgage they’ll give you. Many lenders also use their own form of testing to decide how much they think you will be able to pay back.
Myron Jobson, senior personal finance analyst at Interactive Investor, said: “Affordability has been a perpetual issue for wannabe homeowners for many years. Loosening the mortgage underwriting standards might ease their plight, lenders’ approach to affordability will continue to vary.
“Unwinding these measures amid the cost-of-living crisis run the risk of people biting off more than they chew financially to purchase a property. This could be a particular issue among first-time buyers - many of whom have seen their desperate efforts to buy thwarted by runaway house prices and the cost-of-living squeeze on deposit building.”
Gemma Harle, managing director at Quilter Financial Planning, said the LTI flow limit on lending “has much greater impact on people's ability to borrow." She said: "With interest rates starting to creep up to meet the damaging impact of inflation and soaring energy and food prices, you would think that people’s ability to afford their mortgage should really be under the spotlight now.
"First-time buyers also need very sizable deposits and in the current fiscal environment saving this type of money will be very difficult due to increasing rents and the cost of living. On top of this, inflation will be eating away at any other savings they have sitting in cash.”
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