Bank of England is looking at relaxing mortgage affordability rules in 2022!

  • Jan 6th 2022

Bank of England (BoE) is looking at relaxing mortgage affordability rules to make it easier for first-time buyers to step on the property ladder in 2022.

The BoE's Financial Policy Committee (FPC) introduced new affordability guidelines in 2014 to stress test a buyer when purchasing a house with a mortgage. These stress tests were introduced to reduce the number of defaults on loans and house repositions. 

One of the affordability requirements borrowers are currently required to show is if they can afford repayments if their mortgage reverted to their lender's higher variable rate and if interest rates went up to 3%.

During one of the many reviews the FPC carries out, it was outlined that this rule is no longer needed. The FPC will consult with mortgage lenders about withdrawing the 3% interest rate rule. 

If this rule is withdrawn, it will make it easier for first-time buyers to get on the property ladder, alongside a high chance of receiving a better mortgage deal.

The FPC introduced affordability guidelines in 2014 to protect the banking system from another financial crisis when many households had a high level of debt. 

These affordability guidelines included lenders to limit the borrowing to 4.5 times a person's income. Lenders also have to ensure that borrowers can afford their mortgage repayments once the introductory deal ends. This calculation was made based on interest rates increasing by 3% from their introductory rate, as the FPC expected the Bank of England to increase the base rate to 2.25% over the 5 years following the introduction of these affordability guidelines in 2014.

Today, the Bank of England base rate currently stands at 0.25%.

Withdrawing the 3% rule means that first-time buyers will have a much higher chance to pass the current stress tests which are in place. 

If a first-time buyer was applying for a two-year fixed-rate mortgage with interest charged at 1.99%, they would have to show they could still afford repayments if the interest rate was 7.5%.

For example, if a first-time buyer was looking to buy a home for a £160,000 mortgage on a 1.99% mortgage deal, their monthly payment would be £682. Based on this calculation, there is a higher chance of a mortgage application being approved. However, with the 3% means test, the monthly payment would jump to £1,196 at the rate of 7.5%, making it less likely for the mortgage application to be approved. 

Although the FPC is looking to remove this calculation, it has decided to keep it on high loan-to-value mortgages.

Although this is good news for first-time buyers, the current property market has also seen property prices increase since the introduction of the Stamp Duty Holiday, due to the market seeing more buyers than available properties. 

Although there are many ways in which first-time buyers can get help to get onto the property ladder, a growing number of people are just looking to rent and not buy. This has caused developers in the city to build new high-end luxury apartments for rent to cater for this growing market.

With the many changes taking place in the property market, It will be interesting to see how the property market shapes up in 2022, especially the first-time buyer segment, who once dominated the share of purchased homes. 

Whether you are looking to Buy, Sell or LET, speak with our team today by calling 0116 266 9977!