UK mortgage lenders will no longer need to check that homeowners could pay their mortgage payments at higher interest rates after the Bank of England’s affordability recommendation was withdrawn. The test will no longer be required from August 1.
The affordability test was one of two safeguards first introduced in 2014. It was brought in to avoid buyers borrowing more than they could afford, or spiralling into debt in the event of rapidly rising interest rates.
Previous recessions, such as the 2007 credit crunch, have shown that in an economic downturn households with the most debt are more likely to cut spending sharply. This has the effect of amplifying economic downturns.
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But the Bank of England has determined that the remaining affordability checks will deliver the appropriate level of resilience to the UK financial system. These include the loan-to-income (LTI) ‘flow limit’ and the wider assessment of affordability required by the Financial Conduct Authority (FCA)’s responsible lending rules.
Ditching the rule will offer a simpler, more predictable and more proportionate way to safeguard lending, the Bank said. The Bank added that the majority of consultation responses were supportive of the proposals.
But the rule change may have little impact for potential borrowers struggling to afford a home loan due to the steadily increasing mortgage rates being offered by lenders, following a string of Bank of England base rate hikes. There has also been a record increase in house asking prices.
Data released by Rightmove on Monday revealed that the average asking price in Britain has been at a record high for five months. It now stands at £368,614.
Gemma Harle, managing director at Quilter Financial Planning, said: “While it is potentially bad timing for the announcement, the change in the affordability rules may not be as significant as it sounds as the loan-to-income (LTI) ‘flow limit’ will not be withdrawn, which has much greater impact on people’s ability to borrow. Although the shift in rules is one of the many attempts to help first-time buyers get their foot on the ladder, it may end up having the opposite effect.
“One of the main drivers behind ‘generation rent’ is the fact that house prices have massively outstripped wage growth. Due to high house prices, first-time buyers also need very sizeable 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. House prices have become further and further out of reach for prospective buyers and this change in the affordability rules could perpetuate unsustainable further growth as it steps up demand in a market already suffering with limited stock.”
What is the loan-to-income (LTI) ‘flow limit’ mortgage check?
The loan-to-income (LTI) ‘flow limit’ is a restriction on how much the buyer can borrow in relation to their annual salary. It limits the number of mortgages that can be extended to borrowers at LTI ratios at or greater than 4.5 times their annual income.
This check will remain in place. The affordability check that ensures buyers will be able afford their mortgage payments if interest rates increase will be ditched from August 1.
What is the average mortgage standard variable rate (SVR)?
The average mortgage standard variable rate (SVR) reached 4.91% in June, marking the highest level it has recorded since February 2009, Moneyfacts.co.uk said on Monday.
An SVR is the default rate of interest set by your lender. Mortgage borrowers are usually moved onto an SVR when their initial fixed-rate deal comes to an end after a couple of years.
What is the average fixed-rate mortgage?
Currently the average overall two-year fixed-rate mortgage stands at 3.25%. This is the highest rate since November 2014, Moneyfacts said.
The overall five-year fixed-rate average sits at 3.37%, which is the highest on record since June 2015. The average two-year tracker rate is 2.54%, this is the highest since September 2014, according to Moneyfacts which has taken all deposit sizes into account.
The gap between the average two and five-year fixed rates is currently at 0.12 percentage points. This is the smallest gap Moneyfacts has seen since 2013.
Eleanor Williams, finance expert at Moneyfacts, said that even those putting down a sizeable deposit were being hit with the increases. Eleanor said: “Average rates for those with higher levels of equity or deposit have seen some of the steepest increases, which may come as a surprise as products at this end of the LTV (loan-to-value) spectrum have traditionally been priced lower, in part due to the smaller risk of default they tend to pose for providers.”
