The Bank of England this week announced that it would relax the current mortgage affordability rules to enable more first-time buyers to secure a mortgage and purchase their very first property.
According to the latest announcement, the Bank of England will relax mortgage lending rules as soon as August 1stproviding major relief for buyers against a backdrop of rising costs, record inflation and interest rate rates.
Several new affordability rules were implemented for lenders 8 years ago in order to protect the banking system from high levels of borrowing following the financial crisis in 2008. The Bank’s Financial Policy Committee (FPC) asked lenders to ensure that borrowers could still afford their mortgage repayments when their fixed rate deal ended and if interest rates rose. The FPC also required lenders to put a limit on the number of mortgages they offered to people borrowing 4.5 times their income to just 15% of their total lending. This restricted many potential buyers in what they could afford.
At present, borrowers are required by their lender to show them how they would be able to afford their monthly mortgage repayments should their mortgage revert to their lender’s higher variable rate with the premise that interest rates would have jumped by 3%. However, after consulting lenders and other members of the industry, the Bank’s Financial Policy Committee (FPC) intends to scrap the rule this summer.
This change is welcome news for first-time buyers, who were most likely to have struggled to secure the lending they need due to this rule. At present it’s already challenging for first-time buyers to get onto the property ladder, and it’s helped that this will give them a much needed boost.
When the rule was introduced by the Bank of England interest rates were predicted to rise to 2.25% in the coming five years. When the FCA launched the consultation into affordability and lifting the rule, it didn’t seem likely that interest rates would reach this level and so it was ruled that the test wasn’t needed going forward.
However, inflation has now soared to a 40-year high of 9%, causing the Bank of England to raise interest rates five consecutive times to 1.25%. Whilst this is still under the anticipated 2.25%, interest rates could now exceed 3% in the next year or so. If interest rates rise by a further 1.5%, borrowers could have to show they could afford a mortgage rate of over 9% if the rule were to stay in place. This would prevent many buyers from purchasing a home.
This decision is good news for first-time buyers who take home a lower salary and have a smaller deposits than those moving up the ladder, making them more unlikely to meet the affordability test.
Clyde Property is a leading independent, multiple award-winning estate and letting agent with more than 30 years’ experience in selling and letting property in Scotland. Just call your local Clyde Property branch today for friendly, impartial advice on finding your next dream home.
