Thousands of potential homebuyers may find it easier to get on the property ladder after the Bank of England scrapped a key mortgage affordability test.
The central bank has said the change, which will come into effect from August 1, should not be seen as “a relaxation of the rules”. However, some commentators said that while the move would be welcomed by many, there was a risk that some people would take out mortgages they could not afford.
The Bank has removed a requirement that required borrowers to be able to afford a three percentage point increase in interest rates before they could be approved for a home loan.
This “stress test” was introduced in 2014, after the financial crisis of 2007-08, and was part of a package of measures designed to prevent a repeat of the imprudent lending that some say was widespread in the period before the accident.
The Bank has said that another rule that remains in place, which limits most new mortgage loans to a maximum of 4.5 times a borrower’s income, as well as separate affordability criteria set by the Conduct Authority Finance, “they should offer the right level of resilience to the UK financial system, but in a simpler, more predictable and more proportionate way”.
The Bank has previously indicated that around 6% of mortgage borrowers, approximately 35,000 people, would have been able to get a larger home loan if the interest rate stress test had not been applied.
Claire Flynn, mortgage expert at comparison website Money.co.uk, said that given the cost of living crisis, the removal of the affordability test would likely be seen by many as good news.
He added: “This is because it could allow more people to get on the ladder as they can take out bigger mortgages. However, borrowers will still have to meet the loan-to-income ratio, which could still prevent some from getting the mortgage they need to buy a house.
“There’s also the risk that with less restrictions, some buyers will take out loans they can’t afford.”
Myron Jobson, senior personal finance analyst at the website Interactive Investor, said rolling out the measure amid the cost-of-living crisis “could run the risk of people biting off more than they [can] chew financially to buy a property”.
Banks and building societies take into account various aspects of people’s finances when deciding how big a mortgage they think someone can afford to take out, and traditionally the typical maximum of how much they can borrow an individual is 4.5 times their annual income. This is commonly known as the revenue multiple.
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Banks can offer higher income multiples, but only on a certain proportion of their loans.
With house prices having risen sharply, Halifax and Barclays are among lenders to have raised up to 5.5 times income for high-income borrowers, while mortgage lender Habito will raise up to seven times the you are in some cases.