Getting approved for a mortgage may become easier for some borrowers as the Bank of England will no longer require lenders to perform an affordability stress test.
The central bank test had asked lenders to calculate whether borrowers would still be able to pay their monthly payments if interest rates rose 3 percent above their providers’ standard variable interest rate (SVR).
In June, the average SVR hit its 13-year high of 4.91 percent, according to Moneyfacts, after rising 0.51 percent since December 2021.
This means that borrowers’ finances were effectively tested against the mortgage interest rate of almost 8 percent.
Stress test dropped: Bank of England has eased mortgage affordability rules, but lenders aren’t expected to revise their lending criteria
The test was introduced in the wake of the global financial crisis to prevent banks and lenders from building up loans with a high risk of default.
SVRs are the “standard” rates borrowers go to when fixed-term deals end and they tend to be expensive.
The majority of borrowers therefore switch to a new fixed mortgage agreement and do not arrive at the standard variable rate of their lender.
Those trying to climb or climb the real estate ladder can hope that the removal of the test means they are more likely to be approved for a mortgage.
However, banks and building societies could still choose to keep the test – or something like that – despite the Bank of England’s policy change.
Other borrowing restrictions also remain in place. For example, most major lenders don’t allow buyers to borrow more than 4.5 times their annual income, although some can go a little higher depending on circumstances.
Ben Tadd director at Lucra Mortgages, said: “Stripping these affordability tests, as of today, will do little to help people borrow more money to buy a house.
“It is certainly a small step in the right direction, but the bigger problem of the constraining loan-to-income multicaps needs to be solved.
“In theory, it marginally increases the pool of people who are now eligible for a new mortgage, but certainly for first-time buyers it does not go far enough to help people who are trying to buy their first home.”
Individual lenders have yet to disclose what action they will take, if any.
Chris Sykes, technical director at mortgage expert Private Finance, said lenders have so far kept quiet about possible changes.
Once a lender announces a revised stress testing policy, he says others are likely to follow.
“Often when a domino falls, others follow suit, a priority is set, so when something happens, a bank can almost say, ‘well, that’s how every lender does it,'” he said.
The FCA’s responsible mortgage lending rules still require lenders to make a broad assessment of affordability before approving a loan.
As inflation continues to rise and household costs such as utility bills rise, it is becoming increasingly difficult for many first-time buyers to save for a security deposit
Lenders are cautious amid a cost of living crisis
With mortgage rates currently rising thanks to rising inflation, some mortgage brokers say lenders may be hesitant to loosen their affordability controls.
Ray Boulger, senior mortgage technical manager at John Charcol said: “The biggest threat to the market is a sharp and rapid rise in mortgage payments, as people have become accustomed to bank rates at these very low levels.
“I think most lenders will want to apply a test that’s still close to 3 percent until interest rates seem close to peaking.”
When assessing a potential borrower’s finances, most lenders use data from the Office for National Statistics to estimate the average monthly cost of things like bills and food.
These fees have been increasing lately and banks have factored this into their affordability calculations, making it more difficult to get approval.
James Miles, mortgage advisor at The Mortgage Quarter, said banks could potentially use this additional flexibility to offset the impact on mortgage applications of Ofgem’s energy cap in October.
“Hopefully some lenders will use this flexibility from the Bank of England to offset some of the rising costs and become more flexible with affordability again – while of course still taking a responsible approach to lending,” he said.
“The biggest concern is the ever-rising cost of living which will reduce how much first-time buyers can borrow as most lenders use ONS figures to calculate disposable income.”
The average property now costs almost nine times the normal salary as house price affordability in England has reached the worst level ever recorded by the ONS.
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Mortgage rates have risen significantly as the Bank of England base rate has risen rapidly.
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