borrowing to invest in real estate could become easier

Next week will mark the conclusion of the Bank of England’s assessment of the current mortgage rules. How could this play out for the housing market?

After the financial crisis, the Bank of England introduced stricter mortgage criteria for lenders, and tighter affordability controls became an integral part of mortgage application. This was in 2014, and authorities have reportedly considered relaxing some of those rules for borrowers.

In order to verify that home buyers can afford future repayments, lenders should assess whether they could repay their loan with a hypothetical additional 3% added to the bank’s standard variable rate. This helps to account for any future increases in interest rates, ensuring that borrowers are less likely to default on their mortgage payments. This is also based on a scenario where the borrower reverts to the lender’s more expensive standard variable rate at the end of their fixed rate term.

But according to insiders that extra 3% ‘test’ could be reduced, making it easier for people to borrow money to buy property in the UK than they are now.

Why are changes being considered?

The base rate of the Bank of England has been maintained at 0.1% since March 2020; much longer than anyone expected. Many believe that it is highly unlikely that rates will suddenly jump 3%. Therefore, the current affordability control may be too strict under the current circumstances.

Peter Beaumont, CEO of The Mortgage Lender, comments: “In the circumstances we find ourselves in today, lenders may need to revisit the costs reflected in affordability assessments due to a potential increase in inflation. , ultimately reducing the amount that lenders can offer potential borrowers.

“One of the measures being considered is to reduce the mandatory additional stress charge by 3% which is used to test borrowers’ ability to pay the reversion rate after the end of an initial agreement. This would benefit first-time buyers because it would increase their purchasing power. However, the flip side is that it could make the HPI even worse, which could push house prices to unsustainable levels. “

Getting a mortgage could be easier

For those who buy a property and are seen as “on the edge” as being able to afford it, any relaxation of the rules could increase their borrowing power. For many buyers, including real estate investors and homeowners, this could be good news as it will make getting a mortgage easier.

When a borrower’s current fixed-term contract expires, it is automatically switched to the lender’s standard variable rate. This rate tends to make mortgage payments much more expensive, and current lending criteria are based on this. However, some argue that this is “unrealistic” and that the relaxation of the rules therefore better reflects the current market.

Scott Taylor-Barr, Financial Advisor at Carl Summers Financial Services, adds: “In reality, most people would make a new deal with their lender or remortgage elsewhere.

“It’s an unrealistic scenario, so a move to a lower stress test makes the world a little more real, and more in line with how the market is working now, which is a good thing.”

When will interest rates rise again?

There has been a lot of speculation about when the Bank of England will raise its base rate – and this has a direct effect on lenders’ mortgage rates. The last review saw it hold its current level of 0.1%, and at the time, the odds were that it would be raised at the next opportunity in December.

However, with the spread of the new Omicrom variant of Covid, the brakes could be held back on any rise in the immediate future.

Commenting on the chances of that changing, Brian Hilliard, an economist at Societe Generale, said: “While even the most hawkish MPC member signals that it might be worth waiting to see how far Omicron emerges. in this case, we should expect other members to have similar concerns.