The Bank of England (BoE) may relax mortgage affordability checks, which will make it easier for first-time buyers to get on the property ladder, This is Money reports. It will also help those seeking to remortgage or find a better deal. However, it may also have a potential downside if it further fuels the rise in house prices.
What are mortgage affordability checks?
Affordability checks are carried out by the lender to assess your earnings and your outgoings, to check if you will be likely to be able to meet the repayments during the term of the mortgage.
There may also be a ‘stress-test’, which means the lender will want to know if you could accommodate a hypothetical change in financial circumstances, such as separating from a partner, having a child, or a being able to afford a rise in interest rates.
According to the This is Money article, the standard 3% figure used to factor in interest rate rises, known as the reversion rate, may be lowered. This would make it easier for more borrowers to qualify for a mortgage, and will allow them to borrow at higher levels. This gives people the opportunities to live in better areas and in bigger properties.
One financial expert commented: 'In reality most people would either switch to a new deal with their lender, or remortgage elsewhere. It is an unrealistic scenario, so a move to a lower stress test makes it a little more real world, and more in keeping with the way the market is working currently, which is a good thing.'
The stricter tests were introduced in 2014 in response to the financial crash of 2008, which was partly caused by reckless ‘sub-prime’ mortgage lending by financial institutions. However, in today’s changed financial climate, some experts believe the 3% reversion rate is too high.
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