Bank of England scraps mortgage affordability rules – what does this mean for buyers?
The Bank of England recently announced the news they are ditching the mortgage affordability rule, meaning lenders will no longer have to check whether homeowners can afford mortgage payments at higher interest rates.
Why was the rule scrapped?
The rule was originally introduced back in 2014, with a view to make sure borrowers didn’t take on more debt than they could afford. However, from 1st August 2022, they will be relaxing this rule to avoid another 2007-style credit crunch.
The decision was made despite the Bank of England raising interest rates for a 5th time in a row to 1.25% last week, as part of their efforts to tackle inflation.
Nikki Cobb, property law expert, states: “The move might be deemed baffling by some given the current rising interest rates. However, the bank is allowing lenders to rely on the loan -to-income rules, which will remain in place. This will allow lenders discretion when lending and assist those on low incomes, for example, those who have had years of experience of paying rent and have a perfect credit score, but who might otherwise have failed to meet the affordability criteria.”
What does this mean for buyers?
The loosening of the mortgage affordability rules could mean that borrowers who fall short on affordability tests may be able to take on larger mortgages, particularly as the cost-of-living crisis eats into their spending power.
However, banks will still not be able to lend more than 15% of mortgages to people with borrowing over 4.5 times their earnings, and they will still have to meet FCA affordability standards too.
This means banks must be confident borrowers can pay the mortgage when weighing up their income and expenses, and they must take market expectations of future interest rates into consideration too.
If you are looking to buy a property, our conveyancing experts recommend you speak to a mortgage advisor who will discuss your current situation and what your options are.
If you require a highly experienced conveyancer to guide you through the purchase or sale of a home, please contact our property solicitors by calling 01752 292201 or email clientservices@wolferstans.com.