The affordability "stress test" for mortgages has been scrapped by the Bank of England from today.
Under the old rules, borrowers had to prove they could continue to repay their loan if their borrowing rate was to hypothetically increase.
Lenders would check if you could carry on making repayments if your rate was to rise by three percentage points above your loan reversion rate (the rate that applies when your fixed deal ends) in the first five years.
It means that some borrowers might be turned down for a mortgage even if they could afford their loan right now.
The Bank of England has today axed this "stress test" test - although other measures to determine if property buyers can afford a mortgage remain in place.
The other measure used to decide how much you could borrow is the loan-to-income (LTI) “flow limit” which still be used by lenders.
The "flow rate" limits the number of mortgages that can be extended to borrowers at LTI ratios at 4.5 times your income or greater.
Most high street banks will use 4 to 4.5 times your salary as the measure to decide how big of a mortgage they’ll give you.
Both mortgage recommendations were introduced in the wake of the 2007-2008 financial crash, to make sure borrowers didn’t take on more debt than they could afford.
The affordability stress test has caused just 6% of people to take a smaller mortgage than they otherwise might have, according to the Bank of England.
The cost of living is also making it harder to save up a deposit, while the property market has gone through a house price boom during the pandemic Covid.
Claire Flynn, mortgages expert at money.co.uk said: “Given the cost of living crisis, the removal of the requirement for an affordability test likely comes as good news to many.
“That’s because it could allow more people to get on the ladder as they can take out larger mortgages.
“However, borrowers will still need to meet the loan-to-income ratio, which could still prevent some from getting the mortgage they require to buy a home.
“There is also a risk that with fewer restrictions, some buyers will take out loans that they are unable to afford.
“That’s why it’s integral to plan ahead to make sure you don’t commit to a repayment plan that you can’t manage.“
The timing of it being scrapped comes as interest rates continue to climb, with the base rate currently set at 1.25%.
The Bank of England will review its interest rates this Thursday (August 3) where analysts suggest another 0.5 percentage point rise could be on the cards.
Myron Jobson, senior personal finance analyst at Interactive Investor, said: “Loosening the mortgage underwriting standards might ease their plight, lenders’ approach to affordability will continue to vary.
“Unwinding these measures amid the cost-of-living crisis run the risk of people biting off more than they chew financially to purchase a property.
“This could be a particular issue among first-time buyers - many of whom have seen their desperate efforts to buy thwarted by runaway house prices and the cost-of-living squeeze on deposit building.”
