Mortgage Affordability Likely to Improve
The Bank of England has revealed plans to relax the current mortgage affordability rules, making it easier for first-time-buyers to secure lending. The Bank’s Financial Policy Committee (FPC) has decided this affordability rule is no longer necessary.
The current rule that means borrowers are required to prove that they can repay their mortgage each month on the SVR (Standard Variable Rate) should interest rates go up 3%. This test ensures that buyers can still meet their monthly repayments should rates rise – which they have been predicted to do.
The affordability rules were introduced following the financial crash of 2008 to protect the banking system from high levels of household debt. The FPC recommended that banks must limit how many mortgages they could offer for those wanting to borrow 4.5 times their income. In addition, borrowers had to prove that they could afford their monthly repayment if they were moved onto the SVR, and rates went up by 3%.
When these rules were introduced in 2014, it was expected that rates would rise by 2.25% in the next five years, but the reality has proved very different. Today the base rate is 0.25% and even though rates are predicted to rise, it won’t be as much as previously thought and at a slower pace.
The FPC believes there are sufficient limits in place to protect the banking system including a limit of just 15% of lending products to be for those borrowing a high multiple of their income.
If you’re a first-time-buyer looking to purchase a property, this could be welcome news. Typically, those wanting to buy their first home are on lower salaries and have a smaller deposit than someone moving up the property ladder. This, along with the fact that the average cost of a mortgage with a 5% deposit is at an all time low and mortgage availability is at its highest level since 2008, means that many more will be buying a first home.
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