Affordability criteria for mortgages, which aim to ensure that borrowers don’t get into more debt than they can afford, is a regulation that was designed to avoid another 2007-style financial crisis.
Now, banks and lenders have been told they can now scrap some of these affordability criteria. So, could this help you to borrow more when it comes to taking out a new mortgage? Or will this just usher in a new wave of irresponsible lending?
Continue reading to find out how you could potentially take advantage of the situation.
Affordability criteria were designed to stop people from borrowing more than they could afford
The Bank of England’s (BoE) “mortgage affordability test” was introduced in 2014 to ensure that borrowers didn’t get into debt that they couldn’t afford to pay off. It was designed to reduce the chances of another market crash caused by predatory lending practices.
When lenders conduct an affordability test, they establish that potential borrowers can meet their mortgage repayments alongside other debts, monthly bills, and typical household spending.
Since 2014, lenders have also conducted something called a “stress test”. This is when lenders will look at whether you would still be able to keep up with your mortgage repayments should interest rates rise to 3% above your lender’s SVR.
This means that both you and banks/building societies can be sure that you can still afford your mortgage if interest rates were to rise.
You may be surprised to hear that lenders have now been told that they can now scrap some of these affordability criteria. Keep reading to find out why these tests have been removed, and how this could affect you.
The new rule change could make it easier for borrowers to obtain a mortgage
For those that remember the 2007 housing market crash, it may seem bizarre that affordability criteria, which are designed to avoid another financial disaster, are set to be scrapped.
However, the BoE argues that existing limits on mortgages, alongside high loan-to-income ratios, as well as the FCA’s affordability checks, should provide adequate resilience to the UK economy.
In fact, they state that scrapping affordability criteria will make the process of obtaining a mortgage “simpler”, while still offering the necessary security to the housing market.
The scrapping of these criteria will mean that borrowers won’t be assessed on whether they can afford a certain interest rate, so those that may not have been able to afford a mortgage before could potentially do so now.
While scrapping affordability criteria may drive up house prices, it could also help lower-income borrowers
The question remains: is it beneficial that lenders can scrap some affordability criteria? Well, some commentators have stated that existing protections from the BoE and the FCA already offer enough security.
Also, banks still have a duty of care to their customers – they have to be seen as lending responsibly, and they have their own risk committees to ensure lending is responsible.
So, scrapping affordability criteria may allow banks to innovate new lending methods, such as lower stress rates for those that need it. For example, this could allow low-income people with perfect credit to obtain a mortgage.
First-time buyers may also benefit from these changes. Since they may previously have failed affordability checks, but are already paying more in monthly rent than they would mortgage repayments, it could be the boost they need to get on the property ladder.
While the rule change has the potential to help borrowers, some experts are saying that by abandoning these criteria, demand for houses will increase, thus pushing up housing prices.
Indeed, data from the Office for National Statistics shows that housing prices have been at a record high for four straight months now.
So, if demand is driven up further by more potential borrowers being able to obtain a mortgage, housing prices could increase even more.
Of course, we are yet to see exactly how the scrapping of affordability criteria could have an effect on the wider economy, so you should contact us at London Money if you would like to explore every eventuality.
Get in touch
If you would like to discuss the ways you could be affected by, or could take advantage of, these affordability criteria being scrapped, please get in touch. Email enquire@london-money.co.uk or call (0207) 808 4120 to find out more.
Please note
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it. Think carefully before securing other debts against your home.