The Bank of England has announced that, from 1st August, it will dispense with the mortgage affordability test that was introduced after the financial crisis. This is good news for prospective buyers who have been unable to secure a mortgage because of the strict lending criteria.
The affordability stress test
In 2014, tighter lending criteria were introduced. This measure was taken to control the level of risk undertaken by lenders following the 2008 financial crisis. This included a stress test that shows the ability of borrowers to repay their mortgages in the event of an interest rate increase of three percentage points.
As well as the introduction of this stress interest rate, a loan-to-income (LTI) limit was also introduced. Both of these measures aimed to prevent lenders from taking unnecessary risks when granting mortgage loans and to reduce the indebtedness of households. This, in turn, served to protect against a further downturn in the economy.
What will change from 1st August?
From 1st August, the affordability test for the stress interest rate will no longer be required. The LTI limit set by the Bank of England’s Financial Policy Committee (FPC), however, will remain in place. This limit restricts lenders as to how many mortgages they can grant to borrowers using an income multiplier of 4.5 or higher. Currently, lenders are restricted to a maximum of 15% of their mortgage loans being granted to those borrowing over 4.5 times their yearly income.
It’s believed that this LTI restriction – along with wider assessment criteria set by the Financial Conduct Authority (FCA) – will be more effective than the continued use of the affordability test to prevent a rise in aggregate household indebtedness. Current assessments for affordability should already comply with the FCA’s Mortgage Conduct of Business responsible lending framework. Therefore, lenders won’t need to make any changes to them.
How will this affect prospective buyers?
High property prices have put home ownership out of reach for many. Prices have increased far quicker than the growth in wages. This has resulted in prospective buyers being unable to pass lenders’ affordability checks for the size of loan they require. The higher house prices have also increased the amounts having to be paid for deposits. Despite various government-backed schemes to help, first-time buyers still struggle to save enough for their deposits. This is especially the case with the current high cost of living.
The removal of the affordability test for a stress interest rate will provide the opportunity for thousands of first-time buyers to buy their own homes. Not only that but borrowers who currently pass the affordability checks are often restricted as to how much they can borrow because of the stress test. When the lending criteria are modified in August, this should enable some borrowers to secure higher loans for the properties they want to buy in Bexleyheath, providing they meet the necessary lending requirements.
Look forward to buying your new home
The mortgage affordability test won’t be cancelled until 1st August. However, there’s nothing to stop you from preparing ahead of time for your property purchase. Our mortgage brokers – located throughout Kent, London and Edinburgh – can discuss your situation and mortgage needs. They can advise you on the loan amount you can expect to be approved for. They can also guide you on the various types of mortgages available. With unrestricted access to the market, they can search for the most competitive deals to suit your requirements. This includes those only offered by lenders via brokers.
When you’re ready to proceed with a competitive Welling or Pimlico mortgage, give us a call on 01322 907 000. You’ll be assigned a dedicated mortgage broker to look after your mortgage application from start to finish. We can also advise you on the different types of surveys available, recommend a solicitor to handle your transaction and arrange mortgage protection cover as well as buildings and contents insurance cover. If you prefer, send us an email at email@example.com. One of our mortgage experts will reply to you as quickly as possible with more information.