Bank of England Tightens Rules Around Mortgages
Mortgages are still available!
The housing market represents a major sector of the UK economy and the Bank of England keeps it under constant review. To control lending standards, the Bank has introduced new stricter lending criteria designed to prevent lenders getting too complacent about low interest rates and offering riskier loans to those who may not be able to repay them if interest rates start to rise or unemployment grows.
The new rules require lenders to apply an interest rate stress test to investigate if borrowers would still be able to afford their mortgage repayments if mortgage interest rates were to rise by three percentage points above the rate that will apply when their introductory offer ends. When their offers end, borrowers can often find themselves moved to their lender’s Standard Variable Rate (SVR) which can currently be as high as 5.75%, meaning the rate at which the new test is applied is 8.75%.
This move was made as the Bank’s financial policy committee had found that some lenders were assuming that they would not pass all the three-point increase on to their SVRs, meaning they were prepared to lend slightly more to buyers. Under the new rules, lenders will now have to add the whole of the threepoint rise to their SVRs when carrying out their stress tests.
However, this may not be the barrier to getting a mortgage that it might at first appear. Many lenders, especially those with high SVRs, have been routinely stress testing at this level since 2014 when the Bank first recommended it. The Bank estimates that if these rules had been in operation in 2016, mortgages approvals would only have fallen by 0.5%.
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