What the Bank of England’s scrapping of affordability requirements might mean for you

mortgage broker with client

If you are applying for a mortgage this year, it is important to understand how the landscape is changing, and how you might need to prepare.

For example, according to the Office for National Statistics (ONS), the UK’s cost of living crisis sent inflation to 9.4% in June 2022. You could be finding that you are struggling to hit your deposit savings targets, for example, as the price of goods and services increases.

Conversely, in their latest move, the Bank of England (BoE) has rescinded their former requirement that mortgage lenders check borrowers can afford potentially higher interest rates.

This may mean that borrowers could borrow the amount they need for their dream home.

Read on to find out how this rule change might affect you, and how working with a mortgage expert can bring you the peace of mind you need.

The Bank of England recently raised the base rate to 1.25%

In its fifth consecutive rise since December 2021, the BoE raised the base rate to 1.25% in June 2022. 12 months earlier, in June 2021, the base rate stood at 0.1%.

This means that, if you were to take out a mortgage now, you may pay a higher interest rate than you would if you’d bought a home last year.

Of course, budgeting for this increased liability is important. While the base rate may reduce again, your mortgage repayments may not decrease in line with it, so you could be paying higher interest for the years to come.

If you are concerned about affording your mortgage in light of the base rate rise, it could be constructive to speak to an expert. We can talk you through options that might help, including remortgaging, or budgeting options to afford higher repayments.

In June 2022, the Bank of England removed affordability criteria for interest rises

Mortgage affordability is a particularly important subject at the moment, because in a surprise move, the BoE has scrapped affordability criteria for interest rate rises.

A Guardian report claims that “lenders will no longer have to check whether homeowners could afford mortgage payments at higher interest rates”.

Before this, in the wake of the 2008 financial crash, the BoE introduced a rule stipulating that mortgage lenders must run affordability checks for higher interest rates when considering a borrower’s application. This move aimed to prevent homebuyers from taking out mortgages they could not afford – an issue that led, in part, to the previous economic crisis.

Now, however, this rule has been removed, perhaps enabling you to borrow what you need for the home you want. Moreover, you could find it easier to secure a mortgage this year, despite other circumstances like the cost of living crisis.

This move, proposed in February 2022 and confirmed in June by the Financial Policy Committee (FCP), will come into effect on 1 August. Although affordability checks on interest rates will no longer be required, the BoE remains certain that other assessments conducted by lenders will be sufficient.

Even so, it could be extremely beneficial to work with an expert if you’re applying for a mortgage this year. We can help you determine if you can afford your move, enabling you to make an informed decision when taking out a loan.

Working with a professional can help ensure you don’t borrow more than you can afford

It is always constructive to work with a professional when applying for a mortgage. Getting an expert opinion on your choices might make all the difference, especially as you may be paying your mortgage for 30 years or more.

In the cost of living crisis, you might feel it especially important to seek professional guidance when taking out a large loan. That’s where your broker comes in: we can assess your financial circumstances, and the mortgage you want to take out, and offer bespoke guidance that can help you understand your affordability status a little better.

What’s more, we can help connect you with a range of lenders who could offer an array of options for you to choose from. By working with us, you can gain the invaluable peace of mind you may need before taking out a large loan on a home.

Get in touch

For guidance on mortgage affordability, or any other queries, email [email protected] or call 0131 339 2281 to speak to us.

Please note

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

Buy-to-let (pure) and commercial mortgages are not regulated by the FCA.

Think carefully before securing other debts against your home.

 

 

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