There has recently been a major change for prospective homeowners that came into effect on August 1st. This change will see the affordability of tests for mortgage borrowers to be removed by the Bank of England, even though interest rates continue to rise.
Before the rule, mortgage borrowers had to provide proof that they would be able to continue paying their loan if interest rates were to increase.
This test required lenders to complete calculations to predict whether potential borrowers could cope if the interest rates increased by three percentage points above your loan reversion rate (the rate that applies when your fixed deal ends).
The borrowers who were unable to prove this, they would not be able to receive a loan, even if they afford the mortgage at its existing rate.
In June this year, it was announced that the Bank of England would be abandoning affordability tests from Monday 1st August. This change has caused some people to believe that it will make it easier for would-be homeowners to get loans, however, others have warned that it will not have an impact on the ease of trying to obtain a mortgage.
According to the Mirror, interest rates recently rose for the 5th time in a row to 1.25% in June.
In 2014, two mortgage recommendations were issued following the 2007/2008 financial crash, this was to ensure that borrowers didn’t take on board any more debt than they could afford, including the now discarded affordability test.
There is another measure that will remain in place, is the loan-to-income (LTI) ‘flow limit’ which limits the number of mortgages that can be extended to borrowers at LTI ratios at 4.5 times your income or greater.
Experts say that some groups including, the self-employed and those working on a freelance basis, will benefit from the cancellation of the affordability tests, others say the scrapping of measures like loan-to-income limits will still cause difficulties for first-time buyers to secure a mortgage.
The UK has seen a huge increase in the cost of living rising and inflation is at a 40-year high, causing thousands of people to struggle to save money in order to put a deposit for a mortgage.
Lenders still use your income to determine how much you can borrow. The majority of high street banks still use 4 to 4.5 times your salary as the measure to decide how big of a mortgage they will give you. Many lenders also use their own form of testing to decide how much they think you will be able to pay back.