Even though first time buyers have historically struggled to enter the property market, they just might get the break they’ve been hoping for thanks to the recent announcement from the Bank of England.
This article does not constitute advice. Professional advice should be taken prior to acting on any part of it. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
The BoE is now no longer requiring lenders to check to see if potential borrowers can afford mortgage payments at higher than current interest rates — known as the mortgage affordability stress test — when deciding if a borrower’s finances are up to scratch and how much they’ll be able to lend.
In the past, this test meant that a borrower needed to be able to prove that they would still be able to afford their loan after the introductory rate offer term, no matter how high the theoretical interest rates climbed. Three percentage points were added on to the standard variable rate, the rate that most mortgages switch to after the initial period, which meant borrowers had to prove they could afford payments with their rate increased to one that was usually much higher than interest rates offered by banks and building societies.
The mortgage stress test was introduced after the 2007-08 financial crash following a period of time where mortgages were available at more than 100% of a property’s price, readily available on an interest-only basis, or were granted without any proof of income. Of course, there were dissenters to this new test, with some industry experts saying that the test was too severe and would dissuade many people who could realistically afford a mortgage from pursuing buying a home.
With the dissolution of the affordability test, many potential homebuyers who may have been deterred or even turned away in the past now have the opportunity to secure a mortgage as long as they have the funds for a deposit, since many would-be homeowners are paying more in rent payments each month than what their monthly mortgage payments would be.
However, having no mortgage stress test doesn’t mean that it will be a lending free-for-all. There will still be criteria to meet and restrictions dictating who can borrow and how much can be be borrowed. The Financial Conduct Authority is still insisting on stress tests, although these are much lower and more sensible.
With interest rates on the rise, be sure you’re doing all you can to appeal to lenders so you can secure a great mortgage deal. For help throughout the entire process, be sure to work with the experts at Dental & Medical Financial Services right from the start of your home-buying journey.