Starting today, there’s one less obstacle to getting a mortgage. The path to high-value home loans has opened up to a much wider audience after the Bank of England rolled back regulations requiring borrowers to show they can handle a three percentage point hike in rates of interest.
In a planned move last year and set up on August 1, the central bank’s financial policy committee said it was scrapping the rule because requiring borrowers to stay within a limit of 4.5 times their income when applying for a loan was enough.
Until now, borrowers had to meet the income test and show that they could afford a significant increase in monthly borrowing costs.
During a short period of consultation, Bank Governor Andrew Bailey said the removal of the affordability requirement should not be seen as a relaxation of lending standards. Instead, those concerned about excessive borrowing, especially by those on modest incomes, should consider a comprehensive framework that still includes many other controls.
Bailey said he believed lenders could be “more efficient” without sacrificing security. “Now having a body of evidence going back about seven years now, we were able to make a much more substantial judgment about the effectiveness of the tests,” he said.
The backdrop for the decision is a sharply slowing housing market which ministers say will rob the economy of a vital boost if it weakens further. Monthly transactions are already half of those in spring 2021 and while house price growth has remained strong, the latest data shows it is starting to slow after a 12% peak.
Data from the Nationwide Building Society on Tuesday is expected to show a marked slowdown. A survey by online broker Zoopla found annual price growth to be 8.3% and warned that by the end of the year a much more modest rate of 5% would likely be the average.
Interest rates have risen from 0.25% last year to 1.25% today and are expected to reach 1.75% on Thursday when the Bank’s monetary policy committee meets to discuss the outlook for the two coming years. And while mortgage rates remain low by historical standards, the loan amount needed to buy 90% of an average home has never been higher.
Covid-19 has put another twist on the housing market story, with lenders coming under pressure from rising levels of mortgage distress. Around 6 million people have struggled to pay their mortgages as a direct result of the pandemic, according to Citizens Advice, although few have been forced into default after a payment holiday scheme came to the rescue.
It is in the context of a slowing market, wage increases below general inflation and a context where many households are struggling to meet monthly payments that the industry wishes to expand the network of potential customers.
Henry Pryor, a procurement officer, said the Bank would have come under intense pressure from a lending industry keen to embrace more unconventional households. “It must be a risk for the market,” he said.
Thirty years ago, following the last major housing price crash, lenders were forced to impose strict requirements on customers who wanted high loan-to-value mortgages. A process in the 1990s of scrapping these rules in the move to “light” regulation is widely credited as the precursor to the 2008 crash.
Bank of England officials are asking us to have faith in them and the mortgage industry when they start to cut basic requirements again. Many will say that trust has yet to be earned.