The Bank of England has stated that home buyers will need to pass strict affordability checks if they apply for a mortgage, despite interest rates remaining low.
During the last few months, interest rates have plummeted to their lowest ever, and lenders are expecting them to remain relatively low in the near future. However, officials have stated that they want to prevent households from taking on too much debt.
Applicants for a mortgage need to prove that they could afford the higher mortgage repayments if the interest rates increased by three percentage points during the coming five years. Although the banks believe that an increase to that extent is unlikely, the Bank of England wants to retain its strict criteria. The minutes taken from the recent meeting of the Financial Policy Committee, state:
“On the one hand, market yields suggest that a 300bp increase in rates had become a less probable event; on the other hand, relying too heavily on market yields would be imprudent, given that market prices were volatile and could adjust materially in the light of news – as evidenced by the sharp increases in sovereign yields that had followed the US election result.”
The bank conducted a study on the households which have the greatest debts, and the results showed the average borrower had a mortgage equivalent to 4.1 times the annual household income. These levels are the highest on record.
Mortgage advisers study a CeMAP course so that they can help borrowers to maintain a sensible level of mortgage debt, while locating the most suitable deal.
