On 1st August the Bank of England are dropping the affordability test for mortgage lending. Up until now mortgage lenders had to follow the affordability rules set out by the Bank of England.
The first of these rules is a stress test to check the house buyers’ finances. Under this rule, house buyers must be able to show that they can afford to pay 3% above the standard mortgage rate.
In many cases this has prevented people taking out larger loans for the property that they want.
But as of 1st August, that test is being scrapped which may allow people to apply for larger loans.
There is however another rule that is not being scrapped which is nothing to do with a person’s ability to pay but more about risk exposure for the lenders. Essentially, the rule restricts the number of mortgages that can be extended to borrowers where the Loan to Income (LTI) ratio is greater than 4.5x income.
In other words, when the lender reaches the limit of 15% of the number of new residential mortgages with LTI at or greater than 4.5x income, they are not allowed to offer any more loans at that LTI ratio. So, even if the borrower can meet the lending requirement, it is the lender who is not able to make the offer.
In summary, while one rule is being dropped to enhance lending , the other may still prevent it.
Alison Mitchel of RobMac Mortgages said: “While the intention was to make sure banks and building societies don’t overexpose themselves. It can be seen as another possible factor that has resulted in a cautious approach when it comes to lending to people with a high LTI ratio.
The challenge for lenders who do allow lending at a high loan-to-income is they are now likely to be flooded by more applications, which will then have a knock-on affect to the consumer.
This means we might see other lenders tighten up their policies accordingly and consumers who rely on there income instead of hefty deposits, may have challenging times ahead.”
If any of the above is of interest to you and you would like to discuss your mortgage further, you can arrange to meet online with one of our financial advisers by scheduling an online meeting here >>
