Relaxation of affordability rules
Posted on 26th February 2022 at 14:15
Bank of England considers withdrawing affordability test for residential mortgage lending – but will this affect the Buy To Let market?
What is the current situation?
The Bank of England is considering ditching the affordability rules that cap how much people can borrow to buy (or remortgage) their home.
In 2014 the first of the residential mortgage affordability rules were implemented to help protect households from taking on too much debt which could, in turn, lead to an even greater economic downturn.
These rules included a “loan-to-income” limit, and since that date, banks have been limited on the number of mortgages they can offer where a borrower requires more than 4.5 times their salary.
The other rule being reviewed is whether the affordability test equations should still factor in the reversion rates (this is the default mortgage rate which the initial special offer deal is switched on to at the end of that offer period – also known as the standard variable rate (SVR) and these are usually far more expensive). They use this to determine if a borrower can still afford their mortgage if the rate increased by 3% above the reversion rate.
What’s happening now?
However, the time has now come and the central Bank has launched a consultation period to consider changing the affordability tests that mortgage lenders currently utilise. As a result, this could mean that this would allow more potential and existing homeowners to borrow larger mortgages.
The Bank is seeking views on the proposal to withdraw the affordability test.
They have implemented a consultation process which asks how lenders and the mortgage market would respond if the test was to be withdrawn. The consultation will close on May 6, after which the responses will be considered by the Bank’s Financial Policy Committee.
It's likely that the loan-to-income rules will remain the same, although the stress testing could be ‘less stressful’. The effect of relaxed rules could be that repayments might be based on the market's expected interest rate changes over the next five years, or a 1 per cent increase on today's rate - whichever is higher.
There are already, however, many residential mortgage lenders, including Santander, Barclays and TSB who have updated their affordability calculators due to changing rates and living costs. The effect of looser affordability rules might still be offset against rising rate and energy bill costs … and so this all has to still be taken in to consideration too.
Ok, so this might help homeowners to borrow more … but how might this affect the rental sector / Buy To Let market?
It’s been mooted that the relaxation of these tests means that maybe this will allow many more hopeful first-time buyers to get their foot on the property ladder, whereas previously they were priced out. Good for them, but is it an issue for landlords who have enjoyed years of demand for their properties from people who could only afford to rent?
With fewer tenants on the market, could it be that landlords will have to reconsider their current rent levels? Or a change in property rental strategy, maybe leaning towards introducing some holiday lets or commercial property into their portfolios and not relying so heavily on the private rental sector?
Forward planning, and is this a given?
This is all still just in the consultation stage, however potentially changing economic factors should not be dismissed, and neither should property owners / mortgage borrowers have a ‘wait and see’ attitude. Robust businesses will always start the year with a business plan, including cashflow forecasts to include potential threats to their sector and strategy…. and so why shouldn’t we, as property investors, all do the same as well?
No-one has a crystal ball, or has ‘inside knowledge’ of what the landscape will definitely look like over the next 3, 5 or 10 years. We all, however, do have hindsight which is always 20/20.
So, with the knowledge that the Bank is conducting the review and that possibly there may be an impact on the rental market due to fewer renters creating the demand because they have chosen to buy instead, what can you – as BTL investors - do to help yourself and your net income from your BTL’s, right now?
What can you do now, to protect the future?
We are receiving so many calls from anxious mortgage borrowers who wish to try and keep their underlying costs as low as possible, in the face of these recent rate increases and possible further future higher costs too.
One crystal ball foresight we can provide, is that we know what the available rates are today, and so even if your current mortgage special offer deal is not due to finish for another 3-6 months or so, we can help you to secure todays rates, for an easy switch over for the future when your existing deal ends.
We’re continuingly monitoring the market and also the peripheral issues such as the Bank of England’s consultations, and we’ll continue to post updates as and when we can.
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