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Bank of England relaxes lending rules, but impact could be limited

Christina Hoghton
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Christina Hoghton

Lenders no longer have to ‘stress-test’ a borrower’s ability to repay their mortgage based on rates rising by three percentage points, but other restrictions on lending still apply

The Bank of England has scrapped the requirement for mortgage lenders to ‘stress test’ affordability – a move that could make it easier for some borrowers to get the mortgage they need to buy a home.

The test was introduced in the wake of the global financial crisis in 2014.

Lenders had to make new checks to ensure borrowers could afford their mortgage repayments. They needed to check that repayments were affordable, not just at the agreed interest rate, or even the reversionary rate they’d go onto after their initial deal, but also in the event that interest rates rose by three percentage points.

What do the changes mean for borrowers?

Despite the removal of this affordability rule, lenders are still obliged to ensure borrowers can afford their mortgage in the event of rising rates under separate statutory regulations.

In reality, some may not actually need to or want to change their lending criteria. But the removal of the rule means that lenders can, in theory, lend more more generously in some circumstances if they want to.

Brean Horne from NerdWallet, said of the changes: “Scrapping the mortgage affordability test sounds severe. In reality, the impact of the change will be limited – the same fundamental equation remains, as a borrower’s income will be weighed up against the size of their deposit, the size of the loan and the value of the property. Ultimately, the same issues will remain for would-be homebuyers.

“The latest data shows that average house prices in England are 9.1 times an annual salary – the ratio has become larger and larger in recent years. And, as prospective buyers have to contend with the rising cost of living and increasing inflation, getting onto the property ladder has never been more challenging.”