Obtaining a mortgage over the past eight years has been difficult, especially for first time buyers. However, all this is set to change. Here’s what you need to know:
What is the current position?
In 2014 The Bank of England introduced an affordability stress test to be used for mortgage applications. The test is part of recommendations introduced in 2014 in the aftermath of the financial crisis to safeguard against a loosening in mortgage underwriting standards, and a material increase in household debt.
The stress test means borrowers have had to prove they could still afford their mortgage repayments if their mortgage rate was to increase to 3 per cent above their lender’s standard variable rate.
With most borrowers on fixed rates and standard variable rates already higher than these, adding 3 per cent to them to test borrowers’ finances has been criticised as being unrealistic.
The new position
The Bank of England has announced that it will axe the affordability stress test from 1st August. The removal of the affordability stress test means that a typical borrower will no longer be assessed on whether they could hypothetically afford an interest rate of 3 percentage points above 4.91 per cent.
However, whilst the stress test will be scrapped, the other recommendation made in 2014, namely the loan-to-income ‘flow limit’, will continue.
The loan-to-income-ratio is the multiple at which banks will lend, based on someone’s annual salary.
This means banks will continue to place a limit on the number of mortgages they can offer where someone is borrowing more than 4.5 times their salary.
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