Mortgage rules being loosened next week

Bank of England mortgage affordability rules are being loosened on August 1st.

The change will mean mortgages are no longer stress tested at 3% higher than the rate your mortgage reverts to when the fixed period ends.

Potentially this could enable you to get a bigger loan, as lenders won’t be so hamstrung by the rules, which were seen as overzealous from some quarters.

Chris Sykes, technical director at Private Finance, said it was “great news for borrowers that were becoming increasingly tight on affordability and it is limiting their borrowing power with each change to affordability calculators”.

When introducing its Mortgage Market Review regulation in 2014 the Financial Conduct Authority asked lenders to apply a stress test of at least 1% above the lender’s revert to rate.

Then the Bank’s Financial Policy Committee stepped in with its own stress test, standing at 3%.

However from 2018 the 3% stress rate stopped applying to around half of mortgages, as mortgages fixed for more than five years were excluded from tests.

From Monday the FCA’s 1% stress test will be what remains, though the Bank of England also has another safety check in place.

The Bank has asked lenders to retain a ‘loan-to-income flow limit’, which limits the number of mortgages extended at LTI ratios of 4.5 of higher to 15% of a lender’s new mortgage lending.

The affordability stress test has only resulted in just 6% of people to take a smaller mortgage than they otherwise might have, according to the Bank of England.

Gemma Harle, managing director at Quilter Financial Planning, has been critical of the move, previously labelling it “baffling”.

She said: “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.”

However Ray Boulger, senior technical manager of John Charcol, has consistently argued that the stress tests were too overzealous, saying “if the test is too strict some consumers are unfairly excluded from the market, or from trading up, and economic activity is unnecessarily negatively impacted”.

The architect of the FCA’s tougher mortgage rules, Lynda Blackwell, has also played down the potentially negative impacts of the looser measures from the Bank of England.

Former FCA mortgage head – core safety checks are still in place

Comments 2

  1. The stress tests were put in place to prevent a 2nd Credit Crunch, and yet here we are roughly 10 years later and how short some memories are. If the energy crisis, fuel crisis, cost of living crisis, Brexit & Ukraine war wasn’t enough to heed caution I don’t know what is. Utter madness.
    Ironically a fairly clear comparable to ‘action’ being taken to tackle global warming which is equally obvious
    Both are centered around protecting economies/profit of course, what else.

  2. This seems madness. Can’t afford it? Don’t worry we will just lend you more money than we would previously safely lend you so you can afford it. What’s that? Prices have risen as a result of us lending you more money? Never mind we will lend you some more etc. etc. Each new mortgage comes with it’s own millstone for you to wear with pride round your neck.

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