Mortgage applicants will no longer have to prove they can afford a 3% increase in interest rates before being approved for a homeloan, in plans unveiled by the Bank of England.
A scrapping the requirements would make it easier for aspiring buyers to get on the ladder, as well as help mortgage applicants get a bigger loan.
The Bank said limiting new lending to 4.5 times income, as well as affordability criteria by the Financial Conduct Authority, are enough to ensure UK mortgage lending remains safe.
Andrew Bailey, Governor of the Bank of England, said: “We don’t regard it as a relaxation of the rules, rather as an efficiency point, because having now got a body of evidence running back seven years or so now, we were able to take a much more substantial judgment on the effectiveness of the tests.”
The buy-to-let market is subject to a separate stress test, that means buy-to-let mortgages need to underwritten to a minimum stress test of 5.5% for the first five years of the mortgage.
However this doesn’t apply to loans fixed for a minimum of five years.
Martijn van der Heijden, chief financial officer of technology-driven broker Habito, is pleased with the news.
He said “The move by the Bank of England to review lending limits for mortgages is first of all, an improvement of method. Crude income multiples used across the board should hopefully make way for more intelligent approaches using borrowers’ true budgets and individual risks.
“Any new lending limits would also accept that the absolute levels of debt burden are lower at these low interest rates, than what was imagined when the previous rules were first set. Secondly, they are of course a reflection of where house prices in the UK have got to, in comparison to average wages.
“Affordability has been a huge issue for younger buyers for many years. With average British salaries now £31,285 and the average national house price being £270,000, we’re in a situation where the house price to income ratio is now 8.6 – falling way short of the current cap of lending 4.5-5x income.”
He added: “But this also isn’t a universal issue – it’s certainly worse in some regions over others. For example, in London that ratio is 11.7x and that’s what has meant that ever larger deposits are required in the capital. That’s one of the reasons why the Bank of Mum, Dad and Grandparents were needed to lend a record-beating £9.8 billion in 2021. But not everyone has a family who can step in and help in this way, or a partner whose income can be combined with their own, to get a larger loan-size.
“While this relaxing of lending caps will help ease the burden on buyers for having large deposits, lenders will vary in their offering and will also continue to judge every application individually – so it’s unlikely that 6x will be accessible to everyone.”
The Bank Govenor also discussed anxieties around the emergence of the Omicron variant, which is now infecting 200,000 a day.
He doesn’t think its magnitude is going to compare with the start of the pandemic.
Bailey added: “At the moment, I don’t think we are in a situation where there is sort of stress around the corner in terms of markets.”