The Bank of England (BoE) is reviewing the stress tests that mortgage lenders must carry out. For those looking to purchase a house, it could improve their chances of securing the money they need to buy a home and may mean you can borrow more.
Stricter rules for mortgage borrowing were introduced after the 2008 financial crisis. Before the crisis, some borrowers overextended themselves and it was possible to take out a mortgage up to 125% of the property’s value. As property prices fell and unemployment rose, this led to some homeowners finding themselves in negative equity and the number of homes being repossessed increased.
In a bid to ensure borrowers weren’t taking out unaffordable mortgages, the BoE introduced stricter stress tests.
The Bank of England could remove its reversion rate affordability test
One of the measures the BoE introduced after the financial crisis was an affordability test known as a “reversion rate”. The test was designed to ensure that borrowers could continue to meet repayments even if interest rates began to rise from their historic lows.
To pass the affordability test, mortgage applicants have to prove that they could pay their lenders’ higher standard variable rate, plus 3%. However, the central bank is considering relaxing or removing this test, which could make the property market more accessible for first-time buyers and those that want to step up the property ladder.
2 potential outcomes of relaxing the reversion rate
1. You may be able to borrow more
If the reversion rate is removed, you may be able to borrow more to purchase a home.
According to the Telegraph, if the rules were eased to cover a reversion rate plus 2%, rather than 3%, average borrowing power would increase to five-and-a-half times income. This would be the equivalent of being able to borrow 10% more to buy a home. For the average first-time buyer, it’s estimated that it would boost their budget by more than £17,000.
If you’re struggling to find a home within your budget, the change could help you reach your goals.
2. House prices could rise
There are concerns that changing affordability rules could push house prices up even further.
According to the Halifax House Price Index, house price growth is at a 15-year high. In November 2021, the average house price in the UK reached £272,992 after annual growth of 8.2%.
Homebuyers have already found themselves in a competitive market and, with the ability to borrow more, house prices could continue to climb if borrowing rules were eased.
It’s still important to understand your affordability
While the BoE may relax affordability checks, it’s still important to have confidence in your ability to meet repayments.
For many people, their mortgage is the largest loan they’ll take out and it will often be repaid over decades. As a result, you need to consider how you’ll keep up with repayments and what will happen if your circumstances change.
Interest rates have been low for over a decade. For mortgage holders, it’s made borrowing more affordable, but it’s expected that rates will gradually rise. In December 2021, the Bank of England increased its base rate from 0.1% to 0.25%, and it’s anticipated that the base rate will continue to slowly increase. The change in December is likely to have affected mortgage holders on variable- and tracker-rate mortgages immediately and may affect fixed-rate mortgage holders when their current deal comes to an end.
If you’re repaying a mortgage, reviewing how your repayments could increase and what is affordable can help give you confidence.
As interest rates begin to rise, it’s also crucial that you find the right mortgage deal for you. It could reduce the amount of interest you pay or provide you with more flexibility. Even a small change in interest can save you thousands of pounds over the full term of your mortgage.
Even if you already have a mortgage deal in place, you should make a note of when it ends. Usually, you’ll be moved on to your lender’s standard variable rate, which typically isn’t competitive and may not suit you. Remortgaging could help you reduce the cost of borrowing.
If you need to take out a mortgage, approaching lenders that are right for you can help improve your chances of securing the mortgage you need and accessing a competitive interest rate. Please contact us to discuss your mortgage needs.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
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