UK mortgage lenders said they could scrap affordability rules for buyers | bank of england
Lenders will no longer have to check whether homeowners could afford mortgage repayments at higher interest rates after the Bank of England scrapped rules originally designed to head off another 2007-style credit crunch.
The rules, introduced in 2014, were intended to ensure borrowers did not take on more debt than they could afford, and potentially “amplify” an economic downturn and jeopardize financial stability.
The decision to withdraw the affordability test comes despite the Bank of England raising interest rates for the fifth consecutive time to 1.25% last week as part of efforts to tackle the surge in the inflation, which means some mortgage borrowers could be in line for higher repayments.
The Bank of England, which initially consulted on the changes in February, confirmed it would scrap the affordability test after determining that other rules, including those that cap mortgages based on borrowers’ income , were “likely to play a bigger role” in guarding against an increase in household debt.
The central bank said in a statement that these other rules “should provide the appropriate level of resilience to the UK financial system, but in a simpler, more predictable and more proportionate way”.
Experts said while some might find the rule changes “confusing” in light of rising interest rates, the risks were relatively low given that income lending rules would remain in place.
“The timing of today’s announcement that the Bank of England will relax its accessibility rules is somewhat puzzling and may enrage some who still have the financial crash etched in their memory,” said Gemma Harle , managing director of Quilter Financial Planning. “With interest rates starting to rise to cope with the damaging impact of inflation and soaring energy and food prices, you would think people’s ability to pay their mortgages would have to really be in the spotlight now.”
However, she said: “While the timing is potentially inappropriate for the announcement, the change in accessibility rules may not be as significant as it seems, as the ‘stream limit’ of the income loan will not be withdrawn, which has a much greater impact on people’s ability to borrow.
Chris Sykes of mortgage broker Private Finance added that the change would be good news for borrowers who may not meet other affordability tests put in place by lenders that factored in the cost of living crisis. “This is not a case of opening the floodgates; In fact, if the modified measures will even give flexibility close to that which we saw when the rates were 1 %, this is a good question, “he said.
“It is not because the recommendations change that banks will automatically change their way of seeing things; they still have a duty of care, must be seen to lend responsibly, and also have their own internal risk committees which they would need to drive change.
“What will allow is additional discretions or innovations from lenders. Perhaps this could inspire lower stress ratings for those most in need with low income but perfect credit and years of experience paying their rent.