For most young people, purchasing your first home is one of the biggest goals to work towards. After so much hard work and diligent saving, the excitement of finally taking that all-important step onto the property ladder can be colossal.
Of course, in the past few years the rising value of houses has made it increasingly difficult for many young people to buy one. According to data from the Office for National Statistics (ONS), the average UK home cost £283,000 in May 2022, a 12.8% rise on the previous year.
Thankfully, the Bank of England (BoE) have recently announced that they will be scrapping one of the affordability tests for mortgages, potentially making it much easier for buyers. But at a time when many people are concerned about the cost of living crisis, this might strike you as a strange move.
To find out why the BoE has made this decision, and how it could affect you, read on for everything you need to know.
The affordability test was put in place after the 2008 financial crisis
Before we explore why the BoE has scrapped this particular affordability check, it’s important to understand why they implemented it in the first place.
One of the major causes for the 2008 financial crash was that some banks acted irresponsibly and loaned money to people who couldn’t reasonably afford to repay their debts. That’s why the BoE implemented the “stress test” in 2014, to ensure that this couldn’t happen again.
Under the new laws, lenders had to work out if borrowers could afford to keep up with their mortgage payments if interest rates rose 3% above the provider’s standard variable rate (SVR).
The prospective buyers who wouldn’t be able to cope with such a change may have been turned down for the loan, even if they could afford a mortgage at the offered rate. That’s why the test was seen by some people as a barrier to borrowers.
Due to the strong growth in house prices in recent years, many first-time buyers are struggling to buy their own home. One of the main reasons behind the removal of the affordability test is that cutting the red tape makes it easier for people to afford a mortgage.
According to the Guardian, the BoE estimates that as many as 35,000 people would have been able to secure a bigger loan if the barrier hadn’t been in place.
The change could really help prospective buyers who have been unable to take their first step onto the property ladder. For example, this may include tenants who have been comfortably affording rents far higher than their potential mortgage payments would be.
The BoE hopes that the change will help many prospective buyers afford their own home
At a time when interest rates are rising to combat inflation, the decision to scrap the affordability test may seem like a strange one.
In August, the BoE raised its base rate by 0.5 percentage points to 1.75%, which is the biggest increase in almost three decades. Given that further increases may be necessary to combat rising inflation in the next few months, it seems odd that the stress test is being removed when it’s needed now more than ever.
One obvious criticism of the BoE’s decision is that it could lead to the kind of reckless borrowing that led to the 2008 financial crash. That’s why the Bank is keen to stress that one important rule is staying in place.
Despite the change, most prospective buyers will still only be able to borrow 4.5 times their income when applying for a mortgage. On top of this, separate affordability criteria, set by the Financial Conduct Authority (FCA) will also remain in place.
In a statement released in June, the BoE announced that these checks “ought to deliver the appropriate level of resilience to the UK financial system, but in a simpler, more predictable and more proportionate way”.
Working with a planner can help you to find a mortgage that’s right for you
If you want to take your first step onto the property ladder in the near future, the removal of this affordability test is good news, as it means that you may now be able to access a larger mortgage.
Of course, while you’ll still need to prove that you can meet the loan-to-income ratio, you now have one less barrier in your way.
Of course, as we mentioned earlier, the removal of this test may put people at risk of taking on a mortgage that they may be unable to repay. If you want to avoid this worrying prospect, you may benefit from speaking to a professional.
When you work with a broker, we can give you invaluable advice on whether a mortgage might be right for you, as well as finding the one that suits your needs. This can give you much greater peace of mind when buying a home, knowing that you’ve got everything under control.
Get in touch
If you want to know more about how this change could affect you, we can help. Email us at email@example.com or call 0330 320 5048.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.