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Mortgage affordability checks overhauled by Bank of England

Lenders have been informed that they should test affordability by adding three percentage points to their current reversion rate, often the Standard Variable Rate (SVR), which could see even more people priced out of owning their own home.

In 2014, the Bank of England stated that three percentage points should be added to the base rate, but have now amended the rule. Although the Bank’s base rate is currently at 0.25%, it can hit 5% or more once lenders have included their margins. Earlier this year, a study by Which? found that the average SVR was 4.56%, which would mean that borrowers were tested on a rate of 7.56% for affordability.

According to research by the Bank of England, the average stress rate in the last three months of 2016 was 6.8%. The new rules will increase this rate closer to 8%. The Financial Stability Report, produced by the Bank of England, states that the rule was previously open to interpretation by lenders.

As competition in the property market remains, lenders may loosen the standards of the affordability tests. The report also states that the new rules will ensure that borrowers are able to afford their mortgage repayments, in the event that they are unable to refinance their loan with another deal.

According to estimates by the Bank of England, if the new rules had been in place during 2016, mortgage approvals would have been reduced by less than 0.5% in comparison with the previous guidelines. CeMAP qualified mortgage advisors are able to help borrowers decide how much they can afford to repay prior to making an application.

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