News and Insights
3 August 2022
With effect from the 1 of August 2022 the Bank of England has scrapped its mortgage affordability test.
This means that lenders should now have more flexibility to advance loans to people who would otherwise not be eligible for a mortgage. Which, at a time when interest rates are rising, should be welcome news to potential home buyers.
Launched in 2014 to tighten up the mortgage market and prevent any repeats of the mortgage mis-selling scandal, that contributed to the 2008 financial crisis, the mortgage affordability “stress test” has been a significant obstacle for borrowers.
The test was used by lenders to establish whether prospective buyers could afford monthly mortgage repayments for a property. To do this, lenders not only had to work out whether buyers could afford the current cost of the mortgage, but also if they could still afford repayments if interest rates were to increase to 3%.
The test was avoided by approximately 50% of consumers choosing to lock into 5-year fixed rate mortgages and insulating themselves from interest rates rises. But was applicable to the other half on shorter fixed term loans or variable rates.
In reality many potential buyers have been paying more in rent than they would in mortgage repayments and yet have still not been eligible for a mortgage. The adage that you have to prove that you do not need a loan before being considered eligible for one could have been said to apply.
Even though the formal “stress test” has been abandoned mortgage providers are still governed by responsible lending rules which mean that they should not be lending to borrowers who they believe will not be able to repay the debt in the future.
The removal of the mortgage affordability “stress test” should make it easier to borrow, particularly for first-time buyers, but it is unlikely to open the lending floodgates. Lenders remain limited on the number of loans they can advance at more than 4.5% of a borrowers’ joint income - with only 15% of the new mortgages, they write, being allowed to be above that level.
However, the change will allow lenders a bit more flexibility and as a result could benefit some buyers who were struggling to get on the property ladder.
For advice and guidance on buying property in Jersey including buying for the first time please contact the Viberts Property team.