Mortgage Affordability Rule Changes

Will the mortgage rule changes affect first time buyers?

Thursday 11 August, 2022

The Bank of England (BoE) will be making a change to the mortgage affordability test it currently places on mortgage applicants. 

Gulay Dugunyurdu, First Time Buyer Mortgage Broker Specialist in Enfield, North London reviews the rule changes

What does this change mean for mortgage applications, in particular, for first time buyers?

If you are a first time buyer and would like to discuss how these changes may affect your mortgage application, we recommend you call our Thomas Oliver mortgage brokers on 01707 872000. We will be able to provide you with advice based on the most up-to-date information and help you find the best mortgage product for your circumstances.  

In this article we review what the changes are and how they will affect mortgage applications, especially first time buyer mortgages. 

What is mortgage affordability?

If you decide to apply for a new mortgage, FCA rules require lenders to review your financial situation to ensure you are able to undertake the repayment of the mortgage loan.

Following the 2007-2008 global financial crisis, additional precautions were put in place to protect against mortgage defaults, especially in the view of people taking out unsustainable mortgages for their financial situation.

Back in 2014, two mortgage assessment processes were introduced to help to lower the risk of this kind of unsustainable mortgage lending.

The introductions were:

  • A “stress interest rate test” that all lenders applied to potential borrowers’ ability to repay a mortgage. This was to check that the borrower could still make repayments if interest rates increased. For example, from a fixed rate of 2% to a standard variable rate of 4% and then BoE rate increases to 7%.
  • A loan-to-income (LTI) limit. This placed caps on the quantity of mortgages that could be granted to borrowers at LTI ratios at, or more than, a multiple of 4.5 times their salary. 

These tests formed part of the standard application process that lenders must undertake for all mortgage applications. The standard process affordability checks cover elements such as: current outstanding debt and commitments, everyday expenditure, number of dependents and, of course, income levels. 

What is the mortgage affordability change?

The Bank of England has decided to remove the interest stress test for mortgage applications. This means that lenders will rely on the LTI test and the standard process affordability checks as their way to determine if the applicant can afford to repay the loan. 

The BoE’s Financial Policy Committee (FPC) has made the decision that the LTI limit currently in place is expected to play a bigger part than the stress test in averting a rise in overall household debt. The BoE also believes the LTI limit will be sufficient working together with the wider reviews of affordability as determined by the Financial Conduct Authority (FCA)’s responsible lending rules.

In a press release published on their website, the BOE stated:

 “The FPC has regularly reviewed these Recommendations. In its latest review, published in the December 2021 Financial Stability Report, the FPC judged that the LTI flow limit is likely to play a stronger role than the affordability test in guarding against an increase in aggregate household indebtedness and the number of highly indebted households in a scenario of rapidly rising house prices. Therefore, the LTI flow limit without the affordability test, but alongside the wider assessment of affordability required by the FCA’s Mortgage Conduct of Business (MCOB) responsible lending rules, ought to deliver the appropriate level of resilience to the UK financial system, but in a simpler, more predictable and more proportionate way.”

How will the changes affect first time buyers?

Gulay Dugunyurdu, Mortgage Broker in Enfield, North London said:

“As lenders will continue to apply their affordability criteria to new mortgage applications, it is unlikely that, as an applicant, you would see any changes. The deposits required for the range of mortgage products on the market will remain.”

In summary

This change will have little impact on mortgage applications, so it is remains important to speak with a professional mortgage adviser to ensure that you are matched with the best mortgage product that meets your needs, but also helps to lower any potential repayment risks in the future. 

If you would like to discuss your new mortgage, simply call us now on 01707 872000 to book your initial consultation. 

We work with clients across the South East of England, with many of our clients based in North London, Central London, Essex, Hertfordshire, and Bedfordshire.

Author: Gulay Dugunyurdu, First Time Buyer Mortgage Broker in Enfield, North London

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