The Bank of England has announced that from 1st August 2022, the mortgage affordability test – which is used by lenders to check if buyers can afford monthly remortgage payments – will be scrapped.
For many of us (hello, generation rent), the idea of owning our own property is pretty much a pipe dream. In fact, data from the Office for National Statistics (ONS) found that the average home sold in England costs the equivalent of 8.7 times the average annual disposable household income, which is not easily overcome by cutting back on avocado toast.
However, the Bank of England’s decision to remove the mortgage affordability test could potentially make it easier for first-time buyers to get on the property ladder.
Here’s everything you need to know about the changes:
What is the mortgage affordability test?
As it stands, lenders can impose checks on potential buyers to determine whether they could still afford their mortgage repayments – even if the rate increased by up to 3% above their lender’s standard variable rate.
There’s a lot of jargon in there, so let’s break it down. When you’re in the process of buying a house, you can apply for a mortgage loan from your bank to help cover the overall cost. The mortgage is an agreement between you (the buyer) and your bank (the lender) that gives the bank the right to repossess your property if you fail to repay the loan.
Crucially, this loan includes the mortgage interest rate, which covers the cost you pay each year to borrow the money. The mortgage affordability test involves the lender checking that the prospective buyer could still afford their loan repayments, even if the aforementioned interest rate increased by up to 3%.
Will I be able to buy a house now?
Claire Flynn, a mortgages expert at money.co.uk, has cautiously welcomed the news, saying:
“Given the cost of living crisis, the removal of the requirement for an affordability test likely comes as good news to many. That’s because it could allow more people to get on the ladder as they can take out larger mortgages.”
However, Claire also notes, “Borrowers will still need to meet the loan-to-income ratio, which could still prevent some from getting the mortgage they require to buy a home.
“There is also a risk that with fewer restrictions, some buyers will take out loans that they are unable to afford. That’s why it’s integral to plan ahead to make sure you don’t commit to a repayment plan that you can’t manage.”
Ready to jump on that property ladder? Here are Claire’s top tips:
Budgeting wisely is key: Making a list of all your regular outgoings will help you find areas to cut back so you can save more money for your repayments. One way of cutting back is to try and find better deals with your day-to-day providers to help cut costs across monthly bills.