The Bank of England has now scrapped a key element of the mortgage affordability test from 1 August 2022. The affordability test was first introduced in 2014 as a stress test of income, so that lenders could identify whether mortgage applicants could withstand an arbitrary 3% rise in interest rates.
After the financial crash of 2007-8, which was largely blamed on the sub-prime mortgage market, mortgage underwriting standards were made tougher. The affordability test was a consequence of this, to safeguard against householders taking on unaffordable debts.
Given that the Bank of England has recently put up interest rates for the fifth time in a row, (currently 1.25%), some commentators expressed surprise at the move. However, there are still rules in place which limit most mortgages to a maximum of 4.5 times the borrower’s annual income.
The change in rules may work in the favour of people who have a good credit record, but have been unfairly penalised because they have a below average income. They may have been rejected for a mortgage even though the monthly repayment rates would have been much lower than the amount they are currently paying in rent.
People who have a low income, and those who need a bigger mortgage than they can currently afford on their salary, may now be eligible, whereas they would have been previously rejected because of the 3% interest rate rule.
Anyone who thinks this might apply to them is advised to budget carefully, because lenders will still assess all your income and outgoings on a case-by-case basis. Cutting down on non-essential expenses, and making sure you meet all bill and loan repayments on time, will help to put a first-time buyer in a stronger position.
If you are looking for IVA mortgage specialists, please get in touch today.
Your home may be repossessed if you do not keep up with your mortgage repayments.
There may be a fee for mortgage advice. The actual amount you pay will depend on your circumstances. The fee is up to 1% but a typical fee is £595.
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Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it. There may be a fee for mortgage advice. The actual amount you pay will depend on your circumstances. The fee is up to 1% but a typical fee is £595.
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