First-time buyers can borrow £50k more as mortgage rules relaxed - TopAsiaFX

002, Aug 2022

First-time buyers can borrow nearly £50,000 more after the Bank of England relaxed its mortgage lending rules. Policymakers have removed a regulation that means banks and building societies can only grant mortgages to borrowers if they can afford to make payments at three percentage points above the lender’s standard variable rate. These rules were introduced in the wake of the financial crisis to protect consumers but have been criticised for restricting lending. 

Relaxing the rules will allow buyers to take out larger mortgages. But experts said some high street banks would continue to enforce more rigorous tests, as lenders fear house price falls could leave borrowers in negative equity.

Under the new rules, instead of testing if buyers can afford a rate of SVR plus three percentage points, banks are now only required to test against SVR plus one percentage point, in line with regulations set by the Financial Conduct Authority, the City watchdog.

Andrew Wishart, of Capital Economics, a research firm, said if lenders update their policies in response to the rule change, first-time buyers could be able to borrow mortgages worth 15pc more.

For a typical first-time buyer, this would be equivalent to being able to borrow an extra £28,000 on a mortgage. In London, where house prices are much higher, the jump would be an extra £49,000.

But experts said the relaxed rules were unlikely to spark a surge in lending. Although the FCA benchmark is SVR plus one percentage point, banks are likely to test borrowers against SVR plus 1.5 percentage points or higher, to account for the fact that further rate rises are in the pipeline, Mr Wishart said.

Mortgage rates have soared over the last six months, with prices rising at the fastest rate recorded since 1995. The cheapest rates are with Post Office Money, which offers a two-year fix and a five-year fix, for a buyer with a 25pc deposit, at 3.18pc and 3.09pc respectively. Each is subject to a £1,495 fee. Cumberland Building Society offers the next cheapest rates with two and five-year fixes at 3.18pc and 3.3pc, with a £999 fee. 

Separate regulations mean that no more than 15pc of a lender’s new mortgages can be worth more than 4.5 times a borrower’s income. This will cap the number of buyers who would benefit from being newly able to access larger mortgages.

Lenders may not decide to relax their own lending rules fully. Mr Wishart said: “Banks are growing more wary given the economic outlook and forecasts that house price growth will stall or go into reverse, reducing their appetite to lend.”

Each lender is free to develop its own approach. The Telegraph understands that Barclays has adjusted its affordability criteria in line with the FCA guidance. Both Virgin Money and Santander both said they were reviewing their approach.

An HSBC spokesman said the rule change meant some people could borrow “slightly more”, but that “the removal of the stress test will not have a huge impact on those looking for a mortgage with us.”

The bank said: “It is not in the interest of either the lender or the mortgage applicant to over-lend or over-stretch, using future issues.”


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Nationwide also said the relaxation would not alter its lending plans. “As a responsible lender, we always ensure that people can afford their mortgage payments both now and in the future and that won’t change in light of this announcement,” the building society said.

The Bank of England had initially allowed itself until May 2023 to relax its mortgage rules, but acted more quickly than expected to withdraw the rule yesterday. Source: MSN