Bank rips up mortgage affordability rules for buyers
THE Bank of England is pressing ahead with plans to scrap mortgage affordability tests even as interest rate rises pick up pace and fears grow for the sustainability of record house prices.
Rules imposed on borrowers in the aftermath of the financial crisis stopped banks from dishing out loans to anyone who could not afford the repayments if the reversion rate – usually the standard variable rate after their initial deal came to an end – went up by three percentage points.
The aim was to stop banks offering risky loans to those who could not afford them, a key lesson from the crisis.
The Bank is now scrapping these rules from Aug 1.
It argues that an existing limit on mortgages with a high loan-to-income ratio and the Financial Conduct Authority’s other required affordability checks “ought to deliver the appropriate level of resilience to the UK financial system, but in a simpler, more predictable and more proportionate way”.
The decision to scrap the checks, originally reported by The Daily Tele
graph in December, comes even after the Bank raised its interest rate last week from 1pc to 1.25pc, the highest since 2009. As a result, homeowners coming to the end of a fixed-rate mortgage will have to pay as much as £1,344 a year more when refinancing.
Buyers who purchased homes or remortgaged with substantial deposits in 2020 will see the biggest jumps in payments, according to Hamptons estate agents. Costs are rising by the day, with the bill for remortgaging today £252 more than it would have been before last week’s rate rise.
Lewis Shaw, of Shaw Financial Services, said the Bank of England’s change will “increase demand, pushing up house prices while taking out any sort of stabiliser” in the market.
“We have already got a huge supply side problem, so if we then fuel demand further by making it easier to borrow larger amounts, that can only push prices one way, further exacerbating the problem,” he said.
Andrew Wishart, at Capital Economics, said the move would fuel competition among banks, which was “a bit of a risk”. The affordability test also risked forcing the market into a sharper crunch, he added.