Following the announcement that the BOE are raising the base rate to 1.25%, there has also been a somewhat surprise announcement that the UK central bank will end the affordability test from Aug.
What is the “Affordability Test”?
Following the financial crash in 2008, there was a huge review of the market and the way that affordability of a loan/mortgage should be assessed. More stringent regulation was introduced, and the onus was put onto lenders to “lend responsibly”, and not put people in financial jeopardy by overstretching what they can afford.
The mortgage affordability test was introduced in 2014 and was designed to ensure lenders test prospective borrowers ability to repay their mortgages in the event that rates rise to a specified stress level which was 3% higher than the lenders Standard Variable Rate. These stress rates could be quite high and meant that affordability would only stretch to a certain level.
As of 1st August 2022, the stress rate will be removed, and it will be down to the lender to demonstrate that they are applying their own calculations, and “lending responsibly”
How will this affect me?
Despite the removal of the 3% stress test, each lender will need to monitor their loan-to-income flow limit.
Each lender has a that keeps a lid on the number of borrowers with loan-to-income ratios above 4.5 times will stay in place.
Under BOE rules, banks cannot lend more than 15% of their total mortgage book to borrowers looking for more than 4.5 times their annual income. Whilst there are some lenders appealing to raise the tolerance to 20%, there are no immediate plans to do so.
The removal of the 3% means that lenders will now be able to apply their own stress rates, and we have already seen some lenders offering specific products that offer a higher level of borrowing. For example, Nationwide offer a “Helping Hand Product” for First Time Buyers that can offer up to 5.5x annual income. Kensington Building Society are also offering a “Flexible Lifetime Fixed” product that again can potentially exceed 5.5x income. (Please note – these products aren’t available to everyone, and you do need to meet the specific criteria of each lender to qualify)
We are expecting more and more lenders to follow suit, with more products becoming available to offer higher levels of borrowing to certain individuals
What does this mean for the property market?
It’s clear that we are at the end of an era of rock bottom rates.
With the current surges in utility and fuel costs, lenders are having to adapt their affordability calculations to allow for higher living costs. Whilst the removal of the 3% stress rate is a good step towards lenders being able to offer lending on their own terms, they also have to account for households having to spend more to get by each month, which in a way may somewhat negate the removal of the 3% stress rate.
It also remains to be seen if this will have a knock-on effect to the current increase in property prices throughout the UK.
In theory, people may be able to borrow a higher amount than was previously possible, however it may also fuel the continuing rise in property prices if homes are now more easily affordable and demand is still high. Only time will tell!
Speak to an Adviser
As always, if you have any questions or concerns about these recent announcements, the best thing to do is to speak to an adviser.
An adviser will be able to check affordability across the whole of the market and give you accurate numbers to allow you to budget correctly.
At Advantage, we offer independent whole of market advice, and are happy to explain what mortgages are available to you based on your individual circumstances.
Please do get in touch, we’d be more than happy to help!
Tel: 0117 4420604
Book or Chat online: www.advantagefs.co.uk