Lenders will no longer have to apply an affordability assessment to their mortgage customers from August 2022 following an announcement from the Bank of England to remove this rule. After a consultation in February regarding the rule, the Bank of England are happy that other forms of lending caps that are still to be applied will be better placed to assess borrowing limits.
What is the mortgage affordability rule?
Back in 2014 the Bank of England introduced new rules in relation to mortgage borrowing to look to control lending and try to ensure there was no return of a financial crash and resulting credit crunch as seen in 2007. The ruling instigated a stress test to be applied by lenders where the mortgage payment would be calculated at a higher rate thus ensuing the payment was still affordable should interest rates rise to a certain level. This was used in conjunction with the already applied loan to income (LTI) multiples. Whilst this stress test played a vital role in the assessment of loan sizes it also meant that the term of the loan had an impact on how much a customer could borrow. In turn this resulted in some borrowers taking their mortgages over longer terms than they had first envisaged to satisfy the rules.
What does removing the mortgage affordability rule means for you?
Whilst this change will give more flexibility to how lenders assess maximum loan sizes it will not automatically give the ability to throw caution to the wind and enable much higher levels of borrowing to be approved. Lenders still have a duty of care when calculating how much someone can borrow on their mortgage and loan to income multiples will still be a very relevant factor. In fact, it is this latter point that the Bank of England see as a much better gauge of lending in a rising interest rate economy.
Therefore, whilst the removal of the affordability rule will give lenders more scope to adapt their own rules it will likely not change much for the masses.
Why are they removing the affordability assessment now?
The timing of the announcement may appear confusing when the Bank of England has increased Base Rate recently to 1.25% and with possible further rises on the horizon however, it is perhaps in light of this that they have set the date of August 2022 for this rule to be removed. Applying a stress test to an increasing interest rate could actually start to have a detrimental impact on customers. Indeed, in a statement from the central bank they say in relation to other rules that are already in place that these “ought to deliver the appropriate level of resilience to the UK financial system”.
The change will hopefully see lenders use a more tailored approach to their assessments and look at each borrower’s individual circumstances when deciding upon their mortgage needs.
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