Bank of England set to loosen mortgage affordability rules - good or bad?

ended 06. December 2021

Evening landlubbers. A journalist at Thisismoney / Mail Online is writing a piece on rumours that the Bank of England might move to loosen mortgage affordability checks for borrowers, including reducing the reversion rate used in its modelling down from SVR + 3 per cent. This is as part of its mortgage market review that it is  concluding next week. 

She wants to know if this will leave borrowers vulnerable to rate hikes, or whether it is warranted because we are now in a lower-rate environment than when the rules were first set? And what might it do to house prices?

Deadline is tight so go go go. Do NOT write War and Peace. Keep it nice and punchy!

9 responses from the Newspage community

The current affordability checks were bought in to ensure we don't have a repeat of what happened in 2008; people can still borrow if they are creditworthy; the biggest issue is lack of housing supply, and new builds that are not affordable for working people, not mortgage affordability. What's the plan to let people borrow more than they can afford so when rates increase, those who are already at their limits out start handing keys back in? It's a great way to solve the housing NOT!
Mortgage lenders rely heavily on affordability calculators to work out how much people can borrow. Some lenders are already offering first-time buyers, professionals and higher earners 5.5 times salary multiples, but those that do not qualify for income stretches can often only get 4.5 times salary. Easing the affordability rules would help more buyers get on the property ladder, but cause concern about debt levels especially when rates go up.
Whilst most consumers will think this is a great idea, where does this leave the mortgage professional? In the line of fire? Lostening affordability checks is leaving the customers vunerable of being unable to afford payments, and leaving the door open for a barrage of complaints against brokers and mortgage intermederies. But like anything the BOE bring in, its whether lenders follow and its their interpertation on the rules, so I dont expect mych to change
A review is definitely in order, but I predict minor changes, with a minimal impact to borrowers. These rules were put in place over a decade ago and interest rates have not risen anywhere near 3% during that time, so 'stress-testing' mortgage application at this level feels less relevant. We also need to look at the alternative; in most situations it costs more to rent, than it does to buy, yet an applicant may be told they can't 'afford' a mortgage although they already pay more in rent. It's also important to note mortgage lenders can already apply a reduced stress-test when the borrower takes a fixed rate of 5 years or more. So this may only apply to fixed rates that are less than 5 years.
It has been an idea discussed by the Bank on a few occasions recently and it makes sense; any rule like this should be reviewed on a regular basis. The rule was that affordability should be tested against any deals "follow on rate" +3%. The follow on rate was normally the lenders Standard Variable Rate and in reality most people would either switch to a new deal with the lender, or remortgage elsewhere, before they got to that point. Also, the affordability test was applied at the products actual interest rate if the deal was for five years or more. All of this meant the test was stressing only some applications and in an unrealistic scenario, so a move to a lower stress test makes it a little more real world and more in keeping with the way the market is working currently, which is a good thing.
The current out dated affordability checks, are still stopping too many people getting on the property ladder. This especially affects first time buyers and areas with high house prices. This change will help people trapped in rental houses to get a home of their own and gives banks more flexibility to make common sense lending decisions.
If the Bank of England revises mortgage affordability this could be great news for buyers as it'll likely mean people will be able to borrow more. Of course this is always a double-edged sword; in one hand it means people will be able to afford a bigger or better property in the areas they like, but it will also cause house prices to rise further and faster which is the last thing we need at this point in time and could easily lead to a housing bubble which can easily turn into a property crash.
"Affordability assessments are vital and were brought in to prevent the irresponsible lending that we saw leading up to the Credit Crunch in 2008. However, there should be more flexibility in how these assessments are applied. For example, a trainee solicitor at a top city firm will have a good idea as to how their income might increase on a yearly basis, and so a lender should be more lenient, compared to a senior solicitor who has only a few years left to work and does not benefit from yearly salary increases. Be strict but be sensible."
The Bank Of England lending rules were first published in the wake of the financial crisis of 2008 and were an attempt to ensure financial stability to both borrowers and lenders alike. Since then the mortgage market has seen a long period of record low interest rates with house price growth continuing apace. There has been a change in borrowers sentiments towards longer term fixed rates which give borrowers more certainty in mortgage payments. With this in mind the landscape is different today to what is was in 2008 and the rules need to reflect this. Any change to make borrowing easier has its risks and to create more demand could fuel house price inflation but it is also not right to lock people out of the housing market through out of date rules.