Mortgage Rules Eased: What’s Next?

Against a backdrop of impending recession and rising interest rates, there have been certain subtle changes that may enable homebuyers to gain access to the property ladder after the mortgage affordability test was eased by the Bank of England.

According to The Guardian, “The Bank has removed a requirement that forced borrowers to be able to afford a three-percentage-point rise in interest rates before they could be approved for a home loan.”

Previous crisis

Following the previous financial crisis, banks implemented tighter rules to make sure risky loans weren’t offered to people who could not afford the repayments. But, even though we’re in the midst of another financial squeeze, it seems the Bank has had a change of strategy.

The Bank of England has said that the rules are no longer needed, because “the existing limit on mortgages with a high loan-to-income ratio and the Financial Conduct Authority’s other required affordability checks ought to deliver the appropriate level of resilience to the UK financial system, but in a simpler, more predictable and more proportionate way”.

What does this mean for people looking to get a mortgage?

Will scrapping these rules entirely slowly drag mortgage sizes down? Or will it cause a sharper reaction?

We need to explore the potential consequences. This move could be positive for consumers, but we need to examine whether it will impact first-time buyers in a positive or negative manner, or not at all, compared to consumers who are not buying for the first time. First-time buyers face the pressure of needing to save larger deposits to secure a property and are then burdened with higher repayment amounts, furthermore their rate of interest is likely to be higher. This is based on the assumption they present a greater risk. If certain mortgage rules are eased, this could lighten the load for people looking to jump onto the property ladder for the first time.

But, the good thing for non-first-time buyers is the existence of equity from previous sales. The bottom line for both types of buyer is that house prices are making it harder to secure desirable properties that, five years ago, would have been attainable.

With the easing of the affordability test, the borrower is still subject to the new Consumer duty whereby the lender is subject to greater scrutiny when providing the loan. The overriding narrative will be that of affordability and the foreseeability of harm to the consumer/borrower.

Will the housing market crash?

Will there be a crash in the housing market? Will the scrapping of the affordability test soften any crash and actually provide some welcomed stability, or will it cause a sharper crunch? Many think that at worst there will be a slight slowdown rather than a slump. With the huge demand from both the rental and purchase sector, any slowdown may be gradual. This means that greater legal protection afforded by the new Consumer duty will take heightened importance.