A Bank of England proposal to remove its affordability test for mortgage lending could simplify mortgage lending rules. The Bank’s Financial Policy Committee regularly reviews these recommendations. The latest analysis showed that there could be a significant impact on financial stability in the case of rapid house price increases. It also found that the loan-to-income limit is a better tool to prevent this than the current affordability stress test. The Financial Conduct Authority already requires a simpler assessment of affordability. This could be combined with LTI ratio limits. On February 28, the Bank of England announced that the Financial Policy Committee had […] retained the LTI flow limit recommendation, but decided to consult on whether to withdraw its affordability test recommendation. “Nicholas Mendes is a mortgage technical manager at John Charcol. He stated that while lenders will need to ensure that mortgages are affordable, repayments would be based either on the market expected interest rate movement in the next five year or a 1% increase on the current rate. Mendes said that this could mean that homeowners can borrow more in the short-term. However, lenders could choose not to make any changes because it is difficult to predict where rates will be in five years. What impact could these changes have on house prices?” Buyers would be able borrow more and have greater affordability in the short-term when it comes time to find a home. Long-term, homeowners would all be in the exact same boat. Therefore, no homeowner would be significantly better off. Mendes stated that this allows homeowners to increase their offers or bid higher and creates competition with other homeowners who are searching for similar properties. What does this mean for London’s first-time home buyers? The committee ruled that the biggest obstacle to home ownership for first-time home buyers is still raising a deposit. The average London Halifax price. The average price of a London Halifax for a first-time buyer was GBP264,140. With an average deposit of GBP53 935, it was the highest average UK price. What does this mean if you buy using shared ownership? An online calculator (ONS), shows you how much your salary would need to increase to keep up with inflation. Mendes stated that lenders are increasingly looking to incorporate the ONS statistics into affordability calculators. Lenders who have tried it have seen homeowners’ maximum borrowing decrease. This is a growing concern for those currently on shared ownership programs. It is based on future affordability modules that owners who were able buy [based upon previous calculators] wouldn’t be able afford the borrowing they originally took out. Lenders will consider the rise in living costs and higher monthly expenses for buyers who have already purchased. This could make it difficult for them to increase their share of ownership. Mendes stated that the typical client who has purchased through the shared ownership program has not seen their income rise in line with inflation. There are concerns for those who want to use the scheme that buyers might not be able meet affordability criteria if it is revised in accordance with these ONS calculations. What now? The committee is asking for opinions as part a consultation that will close May 6. What now? The committee is seeking opinions as part of a consultation that will close on May 6.
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