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Daily Mirror
Daily Mirror
Business
Sam Barker

Mortgage shake-up will make it easier for low-income workers to get a loan for a house

More Brits will be able to buy houses under plans from the Bank of England to scrap tough rules barring those on lower incomes from getting on the property ladder.

The Bank says that around 6% of people, 30,000 every year, have been forced to take out smaller homeloans due to this strict rule.

A further 6% of Brits have been unable to get mortgages at all.

The history is that, before the 2007 financial crash , mortgages were pretty easy to get.

It was not too difficult to borrow 100% of the value of a house, meaning no deposit was needed. Notoriously, some lenders would even lend up to 125%, often to people who would struggle to repay.

That all came tumbling down after the crash, when many households were unable to keep making their mortgage repayments and lost their homes.

In response, the Bank of England brought in a rule in 2014 to toughen up rules on who banks could give mortgages to.

This rule said anyone applying for a residential mortgage had to be able to afford repayments if mortgage rates rose.

In practice, that meant borrowers had to be able to afford mortgage rates of 3% plus their lender's 'standard variable rate' (SVR) - normally in the region of 4-6%.

So for example, anyone going for a mortgage at Halifax, one of the biggest lender, has to be able to afford mortgage repayments of 6.99% a month - 3% plus the lender's SVR of 3.99%.

The rule was brought in to protect buyers from losing their homes and getting into debt if mortgage rates go up, but since 2014 the opposite has happened and homeloan rates have been pretty low.

The upshot is that borrowers were being asked to prove they could afford mortgage rates of 6-9% when their actual mortgage could be as low as 1-2%.

What is changing?

The Bank is now consulting on removing this rule completely.

There are fears that this could increase house prices.

But Nick Mendes, mortgage technical manager at broker John Charcol, said if this happened at all it would be short lived.

He said: "Will it make an impact to borrowing, yes, because you will be able to borrow slightly more. But longer term everyone will be in the same position."

Not only is this good news for first-time buyers but it also offers a ray of hope to 'mortgage prisoners' .

Mortgage prisoners are people who took out homeloans in the days of easy credit before the financial crash of 2007.

When the 2014 rules came in, many of these homeowners found they could not meet the new affordability rules and remortgage.

Their only option was to fall onto their lenders' SVRs, which kick in after a mortgage term ends.

This meant being stuck paying far above the norm for a homeloan, but being unable to go elsewhere, hence 'prisoners'.

The average mortgage prisoner pays 4.3%, the Financial Conduct Authority (FCA) found.

Mendes said: "When it comes to mortgage prisoners, so much needs to be done to give them more opportunity.

"If there are any changes, and we don't actually know what the Bank is going to come out with, but theoretically it will help a small number of households and help mortgage prisoners move on to other lenders."

However, it all rests on how lenders interpret whatever rules the Bank comes back with, Mendes warned.

The Bank of England plans to keep a second rule from 2014 that means borrowers cannot get mortgages for more than 4.5x their annual income.

Each lender can go above that for 15% of first-time buyers.

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