A new rule change is coming into force that will effect homeowners with a existing mortgage and those looking to take out a mortgage on a new home. The Bank of England has confirmed that the affordability test for mortgage lending will be scrapped from August 1 which will allow homeowners to borrow more money.
The affordability test was first introduced back in 2014 alongside the loan-to-income (LTI) limit which help lenders consider a potential borrower's ability to repay a mortgage back over a set length of time.
The rules were introduced to ensure borrowers didn't get into debt, but despite the current cost of living crisis, the affordability test has now been relaxed. The LTI limit will however remain in place, which limits the number of mortgages that can be extended to borrowers at LTI ratios at or greater than 4.5.
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The decision was made by the Bank of England despite interest rates for a 5th time in a row to 1.25% in a bid to tackle inflation.
Recent data from Rightmove has also revealed the average house price across the UK stands at £369,968 with July marking the sixth consecutive month that prices have hit a record high.
As the affordability rule has been cleared, this could mean that borrowers are now able to take on large mortgages which may be most beneficial for first-time buyers who are struggle to get on the property ladder in the current climate.
Gemma Harle, managing director at Quilter Financial Planning, explainS: “While it is potentially bad timing for the announcement, the change in the affordability rules may not be as significant as it sounds as the loan-to-income (LTI) ‘flow limit’ will not be withdrawn, which has much greater impact on people’s ability to borrow.
“Although the shift in rules is one of the many attempts to help first-time buyers get their foot on the ladder, it may end up having the opposite effect.
“One of the main drivers behind ‘generation rent’ is the fact that house prices have massively outstripped wage growth. Due to high house prices, first-time buyers also need very sizable deposits and in the current fiscal environment saving this type of money will be very difficult due to increasing rents and the cost of living.
“On top of this, inflation will be eating away at any other savings they have sitting in cash.
“House prices have become further and further out of reach for prospective buyers and this change in the affordability rules could perpetuate unsustainable further growth as it steps up demand in a market already suffering with limited stock.”
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