What's Included?
Introduction
The Bank of England is the central bank in the country that has a lot of power. One of their powers is the control of interest rates and what they are set at. As we all know we are in a bad financial situation as a country. Inflation is rising and we have experienced some of the biggest tax rises in 70 years. One approach that the government is keen to use is the raising of interest rates. After much pressure from the government the Bank of England is set to announce the biggest interest rate increase in 27 years. The new rate is set to be 1.75% which is a large increase from the low rates we have seen over the past few years. However, despite this could it suddenly become easier to get a mortgage? That is what we will take a look at in this article
How will this help those applying for a mortgage?
When applying for a mortgage, the Bank of England requires lenders to take a affordability stress test. These tests were introduced in 2014 as a reaction to the 2008 financial crisis to stop people from borrowing more than they were able to. As of June 2022, the stress test rate is set at 4.91%. This test ensures that borrowers are still able to repay mortgage payments after a 4.91% increase above the lenders standard variable rate.
However, the Bank of England will be getting rid of these tests as of August 2022. This means that there will be less tests and red tape for people to go through. Which in turn means it will be easier for people when applying for a mortgage. This could open up to more first time buyers getting onto the property ladder.
What are the negatives when getting a mortgage?
Whilst this all seems well and good there are some negatives to it. The first being that some banks and building societies may choose to keep the test. On one hand there wouldn’t be much change as this is already the current way. On the other it can delay the process when applying for a mortgage or even have your application rejected.
Secondly what we have to understand is that there are borrowing restrictions that remain. One of the biggest restrictions is that lenders won’t allow anyone to borrow more than 4.5 times their annual salary. As we wrote in a previous article here the average house price is 8.7 times an average annual salary. This will result in a lot of people struggling to get past these restrictions.
What wider effect will this have?
Finally looking from the position of the lender removing these checks will be nerving. As stated earlier we are in a cost of living crisis with inflation expected to reach 15%. This means that lenders will be hesitant to loan out money to people, especially with no checks in place.
The other effect is to look at the position of the market. These tests were introduced because of the 2008 financial crisis which was caused by lending money people couldn’t pay back. Without these tests whose to say that the same couldn’t happen again? It’s difficult to predict if history repeats itself, if people learn or if the pursuit of profit will trump all.
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