Getting a mortgage and qualifying for a competitive deal looks set to become easier as the Bank of England prepares to withdraw its eligibility test.
A consultation has been launched by the Bank of England to determine whether the standard affordability test, launched in 2014 to protect households from excessive debt, is still necessary to safeguard the market from a potential crash.
As things stand, banks are not permitted to issue more than 15% of their total mortgage products at a multiple of more than 4.5 of the borrower’s household income. Stress tests must also be performed on prospective borrowers, based on the potential for a 3% interest rate increase to elevate their outgoings in the future.
Such regulations and recommendations are reviewed regularly by the bank’s Financial Policy Committee, which is now considering the potential impact of removing these mandatory eligibility tests. LTI ratio limits and standard affordability tests (already required by the Financial Conduct Authority) could be used instead as a simpler and more flexible alternative to the current system.
“The Financial Policy Committee has […] decided to maintain the LTI flow limit recommendation but has decided to consult on withdrawing its affordability test recommendation,” read the statement published by the Bank of England.
Commenting on the proposal, mortgage technical manager at mortgage broker John Charcol, Nicholas Mendes, highlighted how difficult it can be to predict even the immediate future of the mortgage lending landscape.
“Lenders will still need to ensure that mortgages remain affordable, but the repayments would be based on market expected interest rate movements in the next five years or a per cent increase on today’s rate, whichever is higher,” he said.
“Lenders could also choose to not make any changes, as predicting where rates could be in five years’ time seems almost impossible.”
Potential impact on property prices
In the short term, the reforms could result in mortgage customers being able to borrow more, which could have a temporary knock-on effect on house prices.
“This allows people to bid or increase their offers, and as a result, it risks competition against the same homeowners that would have been searching for the same properties before—but at higher values,” commented Mendes.
As things currently stand, the national average property price currently stands at around £265,000, with the average first-time buyer paying a deposit of just under £54,000.
Mr Mendes also raised concerns regarding potential issues affecting those on shared ownership schemes.
“Lenders are looking at implementing the ONS stats into affordability calculators more regularly, with lenders who have trialled it seeing the maximum borrowing reduction for homeowners,” said Mendes.
“This is a growing area of concern for those who are currently on shared ownership schemes, as based on potential future affordability modules, owners who were able to buy [based on previous calculators] wouldn’t be able to afford the borrowing that they originally took out.”
If the decision is made to withdraw the current affordability test, it may take up to 12 months for the changes to be fully implemented.