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Bank of England may relax mortgage affordability – bumping up house prices


The Bank of England is considering relaxing affordability checks borrowers must pass in order to take out a mortgage in a move that could further stoke house price inflation.

Currently, borrowers applying for a mortgage – whatever the initial rate – will need to satisfy their lender that they could afford to pay a ‘reversion rate’. 

This is a hypothetical future mortgage payment, usually based on the lender’s standard variable rate of interest, plus 3 per cent, and keeps large mortgage borrowing in check.

The potential relaxation of this would better reflect real-life conditions at the end of mortgages, but experts warn that allowing greater borrowing could send record high house prices  up further – a major concern with property inflation running at 10 per cent.

The Bank of England is considering several proposals relating to the mortgage market -including easing borrowing restrictions

The Bank of England is considering several proposals relating to the mortgage market -including easing borrowing restrictions

The reversion rate is designed to make sure the borrower can still pay their mortgage after their initial fixed term ends, even if rates rise.

However, the BofE is said to be considering relaxing this requirement, according to the Telegraph

This could mean lowering the 3 per cent additional interest figure used in the modelling, which would make it easier for many borrowers to pass the checks and qualify for a loan and better reflect the scenario of the low interest rate environment, where most remortgage at the end of deals.

However, making mortgages affordable to more people could have the effect of pushing up house prices, which have already increased substantially since the beginning of the pandemic. 

Lewis Shaw, founder and mortgage expert at Shaw Financial Services, said: ‘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. On 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.’

Stricter mortgage lending and affordability checks were introduced in 2014, in a bid to avoid a repeat of the financial crisis. The credit crunch and subsequent crisis saw mortgage rates rise rapidly and many deals simply disappear, as banks and building societies dramatically reined in lending.

This forced borrowers unable to remortgage at the end of cheap deal periods on to their lenders’ expensive standard variable rates, leading to payment shocks as bills soared.

However, borrowers then were used to paying substantially higher interest rates, and there is an argument that the current requirements are too strict in today’s climate.  

With the base rate now at 0.1 per cent, a scenario where a borrower would have to pay their lenders’ standard variable rate plus 3 per cent when their intial fixed deal came to an end is very unlikely. 

Up and away: House prices have rocketed in the pandemic - the opposite of what was expected when lockdown arrived

Up and away: House prices have rocketed in the pandemic – the opposite of what was expected when lockdown arrived 

Some experts welcomed news of the potential change, saying it would bring the rules more in line with the realities of today’s interest rate environment – as well as reflecting the fact that the majority of borrowers will remortgage when their fixed term ends, rather than drop on to a more expensive standard variable rate. 

Scott Taylor-Barr, financial adviser at Carl Summers Financial Services, said: ‘In reality most people would either switch to a new deal with their lender, or remortgage elsewhere.

‘It is 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 reversion rate proposals are part of a market review that the bank is set to conclude next week.

The BofE is also considering whether to allow lenders to increase the volume of large mortgages they hand out.

Banks are currently limited in the number of home loans they can give to borrowers who need more than 4.5 times their salary, which must represent no more than 15 per cent of their total lending.

Some lenders have started relaxing some of their other affordability rules independently, too.

For example, Nationwide Building Society said in April that it was increasing the amount first-time buyers could borrow to 5.5 times their annual income – although borrowers would need to lock in for at least five years.

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