This week, the Bank of England announced that it was to scrap the Mortgage affordability stress tests, a process that provided lenders the information needed to work out whether prospective buyers could afford the mortgage repayments on the cost of the property.
The stress tests for mortgages were first introduced in 2014 and aimed to make sure that mistakes we previously saw in the run up to the 2008 financial crisis were not made again, such as unrestrained lending to borrowers and the mis-selling of PPI.
Lenders would look into whether borrowers could afford their mortgage repayments, if the interest rate increased by 3% above their standard rate.
If their finances determined that they were unlikely to afford repayments in the event of an increase, lenders could reduce the amount they were willing to lend or not provide them with a mortgage at all.
Adam Male, Chief Revenue Officer at Mashroom comments:
“The removal of mortgage affordability tests is likely to be welcome news for consumers, particularly those who may have been refused a mortgage in the past or unable to borrow the amount they need to purchase the home they want.
Homebuyers who are self-employed, sole traders and freelancers have been hindered by lenders’ stress tests, despite having the means to afford the repayments on a mortgage, so we could see people in these professions jump at the opportunity to finally obtain the loan amount they need.
Despite the removal of affordability testing, I think we’re unlikely to see a huge influx of prospective buyers applying for mortgages any time soon.
The Loan to Income (LTI) test will still be in place, which assesses the buyer’s household income to work out the loan amount and make sure that they can afford the mortgage repayments.
This is there to protect both parties, ensuring that buyers can afford the mortgage repayments and gives lenders peace of mind that they will get their money back, preventing any financial instability similar to what we saw in 2008.
Currently, we’re seeing huge strains on household spending on energy and base rate rises will inevitably affect mortgage repayments for those who are remortgaging or applying for one.
It seems like poor timing to scrap a measure that was brought in specifically for the events we’re seeing now, to test whether households could afford repayments in the event of interest rate rises and changes to the cost of living.
Even though affordability tests have been scrapped, it’s still worth potential homebuyers doing their sums to ensure that they can afford the mortgage repayments, both in the short term and in the future, as well as factoring in the cost of living outgoings.
Consumers should be looking at their household income and monthly outgoings to determine that mortgage repayments can be factored in comfortably.
Seeing your outgoings in one place could identify ways of saving money such as making sure you’re on the correct energy and utility tariffs, as well as helping to cut back on any unnecessary spending.
Make sure you’re aware of any future increases in the cost of living, such as the issues surrounding energy price caps.
This is a major concern for many households, therefore buyers need to make sure that they can factor in any increases in energy bills, on top of mortgage repayments before they take out a loan to buy a property.
Finally, it’s worth Conduct your own affordability test, replicating the recently scrapped process by increasing the interest rate by 3% on the standard rate of your mortgage repayment, to make sure you can afford the costs in the event of further increases in interest rates.”
Brean Horne from NerdWallet, commented:
“Scrapping the mortgage affordability test sounds severe.
In reality, the impact of the change will be limited – the same fundamental equation remains, as a borrower’s income will be weighed up against the size of their deposit, the size of the loan and the value of the property.
Ultimately, the same issues will remain for would-be homebuyers.
The latest data shows that average house prices in England are 9.1 times an annual salary – the ratio has become larger and larger in recent years.
And, as prospective buyers have to contend with the rising cost of living and increasing inflation, getting onto the property ladder has never been more challenging.
Understandably, many prospective buyers will be monitoring house prices carefully in the hopes of a market cooldown.
They will also hope that the scrapping of the mortgage affordability test will be in their favour. However, it’s important to remain proactive and prepare for the opportunity to purchase a property when it arises.
Buyers will strengthen their position by taking the time to evaluate their finances.
This includes looking at their income, expenses, personal savings, credit history and outstanding debts to get a clear idea of their budget and the types of property they can afford.
Additionally, prospective homeowners should carefully consider any mortgage offers and shop around for the best rates and loan-to-value options.
Using online tools like comparison websites can be beneficial and speed up the process.
Will the cost-of-living crisis and rising interest rates bring house prices back down?
Only time will tell.
Either way, it is unlikely to reverse years of steep price jumps that have dented the hopes of first-time buyers.
Buyers who do their research and prepare now will put themselves in a better position to purchase property when the time is right for them.”
Stefan Boronea Co-Founder of neolender, Proportunity, comments:
“While removing the mortgage affordability test is a move in the right direction, the loan-to-income limitations still make home ownership impossible for first time buyers who are struggling due to the cost-of-living crisis and a spiralling increase in rent.
With mortgage rates looking like they will continue to rise – therefore straining affordability even further – many people are already looking at alternative ways to finance their purchases.
However, these only represent a temporary patch on a much deeper wound that everyone seems to ignore.
Much more needs to be done to make homes affordable to the next generation.
Innovation must continue across the mortgage industry, and much needed support must not be removed or stifled as prices continue to skyrocket and incomes fail to keep up.
The ones who do not will be personally responsible for a generational catastrophe.”