Bank of England drops mortgage affordability rules for lenders

Will rule change help first-time buyers or cause property prices to rise further?

Mortgage lenders will no longer be required to carry out stress testing of how affordable a mortgage is when you apply for a home loan.

The tests were introduced back in 2014 in an attempt to guard against some of the loose lending that we saw before the financial crash, and to push lenders into being responsible when judging who they would lend to and how much they would offer them.

It’s important to note that while the affordability stress test is going, the loan-to-income (LTI) ‘flow limit’ will remain in place.

This restricts the number of mortgages lenders can offer to borrowers where the loan is 4.5 times (or more) the size of their income.

The Bank of England’s Financial Policy Committee, which made the call, said that existing affordability assessments required by the Financial Conduct Authority’s rules, combined with the LTI flow limit, were enough to ensure that lending was responsible and carried out in “a simpler, more predictable and more proportionate way” starting in August.

Will it help first-time buyers?

There is a train of thought that removing these affordability rules will give first-time buyers a boost onto the housing ladder.

It’s not exactly a secret that buying a home is incredibly difficult ‒ and expensive.

Even before the pandemic hit, house prices were steadily growing, making it ever-trickier for prospective homeowners to build a sufficient deposit.

However, since Covid reached these shores and the Government introduced the Stamp Duty holiday, house prices have risen at an incredible rate.

According to the latest house price index from the Office for National Statistics, average house prices jumped by 12.4% in the year to April 2022.

To put that into context, it means the typical home was worth £281,000, having jumped by £31,000 over the previous 12 months.

No matter how diligent you are in squirrelling cash away each month, that sort of growth is tough to keep up with when saving a deposit.

The argument goes that, by loosening affordability rules, and allowing lenders to offer quality borrowers just a little bit more cash, it will mean that home ownership becomes more achievable.

We’ve seen in recent weeks plenty of pronouncements from the Government about its belief in boosting home ownership, such as expanding the Right to Buy scheme, and so this would appear to complement that.

This was the last thing we wanted!

However, it’s perfectly fair to question whether that will actually be the result of this change. Removing that affordability test is only likely to boost demand among buyers.

And the reason we have seen such astonishing price rises is because of the level of demand, the competition between buyers meaning vendors are able to ask for ever-higher prices for their property.

So surely any measure that adds to the levels of demand will only result in prices increasing still further. Sure, borrowers might be able to get bigger loans, but will that really be any use if the price of the property they want to purchase has risen even more?

What can you really afford?

It’s also important to recognise that these changes are coming at a testing financial time.

We have seen Base Rate hiked repeatedly since the end of last year, with more increases likely on the way.

As rates head northwards, the cost of that borrowing will become ever more tricky ‒ just because a borrower can afford their repayments today, will that still be the case in a couple of years once their initial fixed-rate ends and they have to remortgage to a deal at a higher interest rate?

This is an even more tricky question to answer given the cost of living crisis.

The rate of inflation at the moment is little short of incredible ‒ according to the ONS, the consumer prices index measure of inflation is now at 9.1%, and could rise even higher in the months ahead.

In practical terms, as the cost of virtually everything we buy is increasing, it means we have far less financial wriggle room.

Even if interest rates don’t move, those monthly mortgage repayments may not be quite so affordable within a matter of months with inflation like this.