The Bank of England recently announced changes to its mortgage borrowing rules, with a key affordability test being scrapped. The stress test, introduced in the wake of the 2008 financial crisis, required lenders to work out if potential borrowers could manage if interest rates rose by up to three percent.
So what does this change mean for you?
Well, it could make it easier for potential mortgage borrowers, such as freelance workers and the self-employed, to be accepted for a loan. But existing loan-to-income limits remain in place, which means borrowers are unlikely to be accepted for a mortgage that’s more than 4.5 times their income. As a result, it’s doubtful that predictions (or concerns, depending on who you ask) that mortgage lenders will be lending to anyone and everyone will come to pass.
What’s the reaction been?
As we just suggested, the reaction to the scrapping of the stress test has been mixed across the mortgage and wider financial sector. Mark Harris, chief executive of mortgage broker SPF Private Clients, for example, was keen to emphasise the positives, arguing that it is “not as reckless as it may sound”.
“The loan-to-income framework remains so there will still be some restrictions in place,” he said. “It is not turning into a free-for-all on the lending front. Lenders will also still use some form of testing but to their own choosing according to their risk appetite.”
Similarly, Claire Flynn of comparison website Money.co.uk believes the end of the stress test is a positive step, given the current pressures on people’s personal finances. “It could allow more people to get on the ladder as they can take out larger mortgages,” she commented. However, Ms Flynn acknowledged that with fewer restrictions on lending, there’s a chance that some buyers will take out loans that they cannot afford.
Myron Jobson, senior personal finance analyst at Interactive Investor, agrees, warning that loosening the mortgage underwriting standards amid a cost of living crisis runs the risk of people “biting off more than they can chew financially” to purchase a property.
This, he said, could cause particular problems for first-time buyers, as many will have seen their “desperate efforts” to buy “thwarted by runaway house prices”. Now it’s rising inflation, preventing them from building a deposit.
That’s why it’s so important to get advice from a professional, regulated financial adviser like ourselves if you’re considering buying a house or taking out a mortgage. Our experienced specialist will always offer advice with your best interests in mind, so you can move forward with confidence that you’re acting wisely and prudently.
