Bank Of England Scraps Mortgage 'Affordability Test' In Boost To First Time Buyers
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Mortgage lenders are to be allowed to scrap ‘affordability tests’ to determine if potential homeowners could afford re-payments.
The rule, which was introduced by the Bank of England in 2014 in response to the financial crash of 2008, was designed to check whether buyers would be able to afford repayments at higher interest rates, and to ensure borrowers did not take on more debt than they could afford.
However, the affordability test will now be withdrawn - despite the Bank of England raising interest rates for a fifth time in a row as part of ongoing efforts to tackle soaring inflation.
The Bank of England confirmed it would scrap the test, saying other rules, including mortgage caps based on the income of borrowers, were ‘likely to play a stronger role’ in guarding against an increase in household debt.
In a statement, the bank said following a consultation it believed that other measures already ink place should ensure the ‘appropriate level of resilience to the UK financial system, but in a simpler, more predictable and more proportionate way’.
While it may seem like a strange move with interest rates rising at their steepest for nearly 30 years, financial experts insist the risks are relatively low as current loan-to-income rules will remain in place.
Speaking to The Guardian, managing director of Quilter Financial Planning, Gemma Harle, said: “The timing of today’s announcement that the Bank of England is going to loosen its affordability rules is somewhat baffling and may enrage some who still have the financial crash burned into their memory.
“With interest rates starting to creep up to meet the damaging impact of inflation and soaring energy and food prices, you would think that people’s ability to afford their mortgage should really be under the spotlight now.”
She added: “While it is potentially bad timing for the announcement, the change in the affordability rules may not be as significant as it sounds as the loan to income ‘flow limit’ will not be withdrawn, which has much greater impact on people’s ability to borrow.”
Chris Sykes, from the mortgage broker Private Finance, said he thought change would be positive for those borrowers who are currently falling short on other affordability tests.
“This isn’t a case of the floodgates opening; in fact, whether the changed measures will even give flexibility close to that we saw when rates were 1% is a good question,” he said.
“Just because the recommendations change it doesn’t mean that banks will automatically change the way they look at things; they still have a duty of care, have to be seen to be lending responsibly and also have their own internal risk committees that they would need to get any changes by.
“What this will allow is for additional discretions or innovations by lenders. Perhaps it could inspire some lower stress rates for those that need it most with low income but with perfect credit and years of experience paying their rent.”
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