A recent development means huge numbers of people looking to buy a property could be priced out of homeownership.
It has been revealed that mortgage lenders have been told by the Bank of England to test affordability in a new way - by using a 3 percentage point increase in their current reversion rate (usually the standard variable rate). This is instead of the previous rule introduced three years ago, which said they should consider a 3 percentage point increase in the Bank Rate.
The Bank base rate is currently at an all-time low of 0.25 per cent. Once lenders include their margins, stress rates typically hit 5 per cent and above. However, earlier this year, Which? revealed that the average SVR was 4.56 per cent, meaning borrowers will have their affordability tested on a rate of 7.56 per cent.
In its Financial Stability Report, the Bank of England has said its previous rule was too open to interpretation by lenders. The report said: “Lending conditions in the mortgage market are becoming easier and competitive pressures in the market remain.
“So there is a risk that lenders loosen the standard at which they test affordability, especially if there is significant scope for interpretation of the policy.
“The new recommendation promotes consistency of implementation across lenders and insures against the risk of loosening underwriting standards.
“It also ensures that borrower affordability is tested in the event that the borrower is unable to refinance their mortgage at the end of the fixed-rate period, which is appropriate given that — in times of stress — some borrowers may be unable to do.”
The Bank of England’s research found that in the last quarter of 2016 the average stressed rate was around 6.8 per cent with the new rules pushing this closer to 8 per cent.
Around half of the mortgages extended in 2016 Q4 were tested using a stressed interest rate of SVR plus 2.75–3.25 percentage points.
The Bank’s estimate is that, had the new recommendation been in place last year, it would have reduced mortgage approvals by less than 0.5 per cent, with a slightly larger impact on smaller lenders than on the major lenders.
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