Securing a mortgage can be a serious hurdle for prospective homeowners. The process of clambering onto the property ladder may have been simplified, however, with the Bank of England announcing this August that mortgage affordability tests will be scrapped.
So, with mortgage affordability tests officially shelved, the process of securing a mortgage ought to be more accessible. Today, we’re going to take a closer look at just how this change will impact the mortgage market, and what it could mean for you.
What was the mortgage affordability test and why was it scrapped?
The affordability “stress test” required lenders to assess whether or not prospective borrowers would be in a position to keep up with repayments in the event that interest rates increased by 3 percent beyond their standard variable rate (SVR).
Borrowers would need to demonstrate that they could afford such a rise before being approved for a home loan. The test was introduced back in 2014 in order to ensure that borrowers were not able to take on more debt than they could feasibly afford, should interest rates rise in the future.
The introduction of the affordability test can be viewed as part of a wider package of measures intended to prevent a repeat of the reckless lending that many believe to have been rife in the run-up to the 2008 financial crash.
However, this stress test was officially scrapped this summer on the 1st of August.
The Bank of England chose to ditch the affordability tests, stating that they were an unrealistic requirement as the SVR’s are typically much higher than a fixed mortgage deal, which buyers are far more likely to stick with.
What does this change mean for borrowers?
The Bank of England’s decision to scrap this stress test should be of benefit to all prospective homeowners, serving to ease the arduous process of securing a mortgage.
The change has the potential to particularly benefit those who are self-employed, too. This is because the accounts and income of self-employed borrowers are treated with considerably more caution by lenders, making requirements more stringent.
Parameters do, however, still remain in place to prevent homeowners from borrowing more than they can realistically afford, and that is not something that is set to change anytime soon.
Most prominent amongst these measures is the Bank of England’s loan to income (LTI) “flow limit”. The flow limit puts procedures in place to stop lenders from permitting borrowers to loan more than 4.5 times their annual income.
According to the Bank of England, this LTI flow limit is now likely to play an even stronger role for lenders in the process of reviewing mortgage applications from prospective borrowers.
Looking to buy your first home? Here at ICS Law we can help, offering a fixed-fee guarantee, meaning there are no extra hidden costs in helping you get on the property ladder. Better still, all of our conveyancing clients receive a 10% discount on our wills!
Call us today on 0191 428 0900 to find out more.