Analysis: Bank ruling that borrowers no longer have to show they can afford steep repayment hikes raises questions over how to curb excessive borrowing
From today, there is one less barrier to obtaining a mortgage. The path to high value property loans has opened to a much wider audience after the Bank of England killed off a regulation demanding borrowers show they can cope with a three-percentage-point rise in interest rates.
In a move planned last year and implemented on 1 August, the financial policy committee of the central bank said it was scrapping the rule because forcing borrowers to stay within a limit of 4.5 times earnings when they apply for a loan was enough.
Until now, borrowers needed to satisfy the earnings test and also show they could cope with a significant increase in monthly borrowing costs.
During a short consultation period, the Bank’s governor, Andrew Bailey, said scrapping the affordability requirement should not be regarded as a relaxation of lending standards. Instead, those that worry about excessive borrowing, especially by people on modest incomes, should consider an overall framework that still includes many other checks.
Bailey said he was convinced lenders could be “more efficient” without sacrificing safety. “Having now got a body of evidence running back seven years or so now, we were able to take a much more substantial judgment on the effectiveness of the tests,” he said.
The backdrop to the decision is a sharply slowing housing market that ministers are concerned will rob the economy of vital thrust if it weakens further. Monthly transactions are already half those in spring 2021 and while house price growth has remained strong, the latest data shows it beginning to slow from a peak of 12%.
Data from the Nationwide building society on Tuesday is expected to show a sharp slowdown. A survey by the online broker Zoopla found annual price growth was 8.3% and warned that, by the end of the year, a much more modest 5% was likely to be the average.
Interest rates have moved higher from 0.25% last year to 1.25% today and are forecast to hit 1.75% on Thursday when the Bank’s monetary policy committee meets to discuss the outlook for the next two years. And while mortgage rates remain low by historical standards, the size of the loan needed to buy 90% of the average home has never been higher.
-19 has provided another twist to the property market story, with lenders coming under pressure from rising levels of mortgage distress. According to Citizens Advice, an estimated 6 million people struggled with their mortgage repayments as a direct result of the pandemic, though few were forced to default after a programme of payment holidays came to the rescue.
It is in the context of a slowing market, wage increases falling behind general inflation and the backdrop of many households struggling to meet monthly payments that the industry wants to widen the net of possible customers.
Henry Pryor, a buying agent, said the Bank will have come under intense pressure from a lending industry keen to embrace more unconventional households. “That must be a risk for the market,” he said.
Thirty years ago, in the wake of the last major house price collapse, lenders were forced to impose stringent demands on customers that wanted high loan-to-value mortgages. A process through the 1990s of scrapping these rules during the move to “light touch” regulation is widely recognised as the precursor of the 2008 crash.
Bank of England officials are asking us to trust them and the mortgage industry when they begin to roll back basic requirements again. Many will argue that trust has yet to be earned.