Are you a prospective first-time buyer? Have you been renting? Do you have frustrations due to not being able to secure a mortgage? You may have seen reports in the press that people are incredulous that they can pay high rents with no missed payments for years, but they are unable to get a mortgage. They have been baffled as to the reasoning behind this. It may, in part at least, be due to mortgage affordability rules. These have recently been axed, which may change the options available to some homebuyers. But what were the mortgage affordability rules, why have they been axed and what does that mean for you? Read on to find out!
What were the mortgage affordability rules?
The mortgage affordability rules were first introduced following the global financial crisis in 2008. The idea behind it was two-fold – to stop people from borrowing more than they could manage to pay back, and also to protect the banking systems from high levels of people borrowing money that they can’t afford to pay back.
The rules meant that borrowers had to prove they could manage to make repayments not just at the current interest rate, but if it increased by 3% too. This is where many potential homeowners tripped up – they could afford repayments at the current rate, but not at a higher rate. Lenders were therefore not offering a mortgage to them, in order to protect themselves against the potential of a future rise.
Why have the rules been axed?
On 20th June 2022, the Bank of England announced that the mortgage affordability rules would be withdrawn from 1st August. But why?
When these additional checks were brought in, interest rates were predicted to rise to 2.25% over the following five years. However down the line, the Bank of England realised that was unlikely to happen within the timeframe specified, and there was therefore no need for the additional checks.
Bank of England interest rates have now reached 2.25% and could reach even higher levels. With lender rates on top of this, mortgage rates could reach upwards of 9%. This would simply be unachievable for many buyers, so the axing of the rules is still going ahead.
Do any of the rules remain?
Yes. The Loan-to-Income (LTI) rule stipulates that lenders can only offer mortgages with an LTI of 4.5 or more for a total of 15% of their total lending. This means borrowing 4.5 times (or more) of the combined income of those trying to get a mortgage. This rule has been kept as it is deemed more effective at stopping borrowers from getting into more debt than they could manage to repay than the original mortgage affordability rules. In turn, this protects lenders from losing money from those who have borrowed mortgages but are unable to make the repayments.
What does this mean for you?
Whilst the affordability rules are no longer a requirement that lenders must carry out, they are also not obligated to axe them. This means it may take some time for the rule change to benefit you. There is unlikely to be an immediate, large impact on borrowers, however smaller impacts are possible. In the medium-to-long term, it may help first-time buyers and those renting to get onto the property ladder.
