Mortgage affordability rule to be scrapped from August 1

An affordability test for mortgages will be dropped from August, the Bank of England has confirmed. The Bank has already consulted on the potential impacts the removal of the affordability recommendation could have on mortgages, and it confirmed on Monday that the removal will take place from August 1.

Two mortgage recommendations were introduced in 2014, to help guard against a significant increase in household debt which could worsen any economic downturn. These were a loan-to-income limit (LTI) and the affordability test, which specifies a “stress interest rate” that lenders must take into account when assessing the ability of a potential borrower to repay a mortgage over time.

The LTI limit, which will remain in place, limits the number of mortgages that can be granted to borrowers whose LTI ratios are equal to or greater than 4.5. According to Rightmove data released on Monday, the average asking price across Britain stands at £368,614 – with June marking the fifth month in a row that it has hit a record high.

Gemma Harle, managing director of Quilter Financial Planning, said: “While the timing is potentially inappropriate for the announcement, the change in accessibility rules may not be as significant as it seems as the Loan-Income Flow Limit (LTI).’ will not be removed, which has a much greater impact on people’s ability to borrow.

“While the rule change is one of many attempts to help first-time buyers get on the ladder, it may end up having the opposite effect. One of the main drivers of ‘generational rent’ is the fact that house prices have massively outpaced wage growth Due to high house prices, first-time buyers also need very large deposits and in the current fiscal environment it will be very difficult to save this kind of money due to the increase in rents and cost of living.

“On top of that, inflation will eat away at any other savings they have in cash. House prices have become increasingly out of reach for potential buyers and this change in affordability rules could perpetuate further growth. unsustainable as it intensifies demand in a market that is already suffering from limited supply.

The government recently announced an extension of the Right to Buy scheme in England and an independent review of access to mortgage finance for first-time buyers, with the aim of widening access to low-cost, low-deposit finance such as 5% mortgages. The Bank’s Financial Policy Committee (FPC) has found that the LTI flow limit is likely to play a more important role than the affordability test in guarding against an increase in overall household indebtedness and the number of highly indebted households in a scenario of rapidly rising house prices.

Therefore, the LTI limit without the affordability test, but alongside the broader affordability assessment required by the Financial Conduct Authority (FCA) responsible lending rules, should provide the appropriate level of resilience to the system. British financial institution, but in a simpler and more predictable and proportionate way, the Bank said. The Bank added that the majority of responses to the consultations were supportive of the proposals.

He said lenders did not need to make any changes as a result, as current affordability assessments should already comply with the FCA’s responsible lending rules. Data from previous recessions suggests that during economic downturns, highly indebted households are more likely to cut spending sharply, which has the effect of amplifying downturns.

Some potential borrowers may find it harder to afford a home loan in any case as mortgage rates offered by lenders rise, following a series of base rate hikes by the Bank of England. Financial news site Moneyfacts.co.uk said on Monday that the average mortgage standard variable rate (SVR) hit 4.91% in June, marking the highest level since February 2009.

Mortgage borrowers may end up on an SVR at the end of their original contract. The two-year average global fixed rate mortgage stands at 3.25% – the highest since November 2014 – Moneyfacts said.

The overall five-year fixed rate average stands at 3.37% and is the highest on record by Moneyfacts since June 2015. The two-year average tracking rate is 2.54%, the highest since September 2014 .

Moneyfacts averages take into account all deposit sizes. Eleanor Williams, finance expert at Moneyfacts, said the 0.12 percentage point spread between the average two- and five-year fixed rates is the smallest the website has seen since 2013.

She continued: “Average rates for those with higher equity or deposit levels have seen some of the largest increases, which may come as a surprise as products at this end of the LTV (loan-to-value) spectrum have traditionally been less expensive. , in part because of the lower risk of default they tend to pose to suppliers. »

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