HOMEBUYERS could be able to get a bigger loan after a major rule change, which is due to happen in a matter of days.
A mortgage affordability test will be discontinued by the Bank of England from August 1st.
Mortgage lenders are currently required to follow the affordability rules set by the Bank of England.
The first of these rules is a stress test to check the buyer’s finances.
When you apply for a fixed-rate mortgage, you lock in your interest rate for a specific period of time.
Once that time is up, you’ll be put on what’s called a “reversion rate” – which is usually higher than before.
As part of the test, you must demonstrate that you can pay a rate three percentage points above the recurrence rate.
This rule has resulted in many people being unable to take out as large a mortgage as they might have been able to afford.
But the Bank of England is now scrapping that test – which could mean you can get a much bigger mortgage.
A consultation will follow on the potential impact that the withdrawal of the affordability recommendation could have on mortgage lending.
The second rule is the loan-to-income (LTI) “flow limit,” which limits the number of mortgages that can be made to borrowers with an LTI ratio of 4.5 or more.
That will not change next month.
Mark Harris, chief executive of mortgage broker SPF Private Clients, said the change could have a positive impact on borrowers who have struggled to climb the ladder.
“For example, first-time buyers who can afford rents well in excess of actual mortgage payments but still failed the affordability assessment,” he said.
What does this mean for buyers?
The elimination of the affordability test should make it easier for potential home buyers to apply for a mortgage.
If you apply for a fixed-rate mortgage, you secure your interest rate for a certain period of time according to the current rules.
After this period, you will be switched to a reverse rate.
You must prove that you can pay a rate that is three percentage points above the repayment rate.
The rule has typically resulted in people not being able to afford as large a mortgage as they might have been able to afford.
Now the Bank of England has abolished the rule that you should be able to take out a larger mortgage.
However, you should always consider how much you can afford and keep it within reasonable limits.
Gemma Harle, chief executive at Quilter Financial Planning, said the change may not really help first-time buyers get a foot on the property ladder.
She said: “One of the main reasons for the ‘generational rent’ is the fact that property prices have massively outpaced wage growth.
“Because of the high real estate prices, first-time buyers also require very high deposits.
“On top of that, inflation will eat up any other savings you have in cash.”
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