An important rule change that will affect people applying for a mortgage comes into force today (August 1). From Monday, a Bank of England affordability test for mortgages will be ditched, giving buyers the chance to get larger loans.
The ‘stress test’, which was brought in during 2014, meant that lenders had to calculate whether potential borrowers would be able to cope if interest rates climbed by up to 3%. The end of that requirement means more potential borrowers may get loans, such as the self-employed or freelancers.
In 2014, two mortgage rules were introduced to help guard against a significant increase in household indebtedness. These were a loan-to-income (LTI) limit and the affordability test, which specified a “stress interest rate” for lenders to consider when assessing a potential borrower’s ability to repay a mortgage over time.
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The LTI limit, which will remain in place, limits the number of mortgages that can be extended to borrowers at LTI ratios at or greater than 4.5. According to recent data from Rightmove, the average asking price across Britain stands at £368,614 – with June marking the fifth month in a row that it has hit a record high.
What will the mortgage rule change mean to me?
Many people have been renting properties with high monthly payments, but at the same time have been unable to qualify for a mortgage because of the stress test. This change may mean they can finally buy their own home.
Mark Harris, chief executive of mortgage broker SPF Private Clients, said: "First-time buyers who have been affording rents far in excess of actual mortgage payments have failed affordability assessments regardless.”
Gemma Harle, managing director at Quilter Financial Planning, recently told BirminghamLive: “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 sizeable deposits. On top of this, inflation will be eating away at any other savings they have sitting in cash."
Which mortgage rules remain in place
Analysts say that borrowers should not expect some kind of free-for-all to be the result of the rule change. They point out that getting together a large deposit will still be the main challenge for potential homebuyers.
The LTI limit rule (see above) will remain, so the level of your income will remain a very important factor. Many lenders also have their own set of rules in place regarding who they will lend to and how much.
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