Next week will mark the conclusion of the Bank of England’s evaluation of current mortgage lending rules. How could this play out for the housing market?
After the financial crisis, the Bank of England brought in more stringent mortgage criteria for lenders, and stricter affordability checks became part of a mortgage application. This was in 2014, and officials have reportedly been looking into softening some of these rules for borrowers.
In order to check that property buyers can afford future repayments, lenders must assess whether they could pay back their loan with a hypothetical additional 3% added to the bank’s standard variable rate. This is to allow for any future interest rate rises, to ensure borrowers are less likely to default on mortgage payments. This is also based on a scenario where the borrower reverts to the lender’s more expensive standard variable rate at the end of their fixed rate term.
But according to insiders, this additional 3% ‘test’ could be reduced, making it easier for people to borrow money to buy property in the UK than at present.
Why are changes being considered?
The Bank of England base rate has been held at 0.1% since March 2020; much longer than anyone anticipated. Many believe that it is highly unlikely that rates will suddenly soar by 3%. Therefore, the affordability check at present could be too strict in current circumstances.
Peter Beaumont, CEO of The Mortgage Lender, comments: “With the circumstances we’re in right now, lenders may need to review the costs reflected within affordability assessments due to a potential rise in inflation, ultimately reducing the amount that lenders can offer prospective borrowers.”
“One of the measures being looked at is reducing the mandatory additional 3% stress charge which is used to test borrowers’ ability to pay the reversion rate after an initial deal ends. This would benefit first time buyers as it would increase their purchasing power. However, the flip side of this is that this could further exacerbate HPI, which could take house prices to an unsustainable level.”
Getting a mortgage could get easier
For those buying a property who were ‘borderline’ in being classed as being able to afford it, any softening of the rules could increase their borrowing power. For many buyers, including property investors and landlords, this could spell good news as it will make securing a mortgage easier.
When a borrower’s current fixed-term deal comes to an end, they are automatically switched onto the lender’s standard variable rate. This rate tends to make mortgage repayments significantly more expensive, and current lending criteria is based on this. However, some feel that it is “unrealistic” and therefore softening the rules reflects the current market better.
Scott Taylor-Barr, financial adviser at Carl Summers Financial Services, adds: “In reality most people would either switch to a new deal with their lender, or remortgage elsewhere.
“It is an unrealistic scenario, so a move to a lower stress test makes it a little more real world, and more in keeping with the way the market is working currently, which is a good thing.”
When will interest rates rise again?
There has been much speculation over when the Bank of England will increase its base rate – and this has a direct effect on mortgage rates from lenders. The last review saw it held at its current 0.1%, and at the time the odds were stacked towards it being raised at the next opportunity in December.
However, with the spread of the new Omicrom variant of Covid, the brakes might be put on any rises in the immediate future.
Commenting on the chances of it changing, Brian Hilliard, an economist at Société Générale, said: “If even the most hawkish member of the MPC is signalling that there might be some value to waiting to see how serious the emergence of Omicron turns out to be then we should expect the other members to have similar concerns.”