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Mortgage affordability rules could be relaxed, says Bank of England

Mortgage affordability rules will be relaxed across the UK if house price growth grows.

A new paper from the Bank of England says the return of house prices virtually to pre-2008 financial crash levels means it has to examine the current affordability rules on borrowing.

Increase in high LTV mortgages

These were introduced in 2014, including the stress test that means lenders must check that borrowers can afford repayments at a mortgage’s introductory rate, at the standard variable rate and if the base rate rises by 3 percent in the first five years of a mortgage.

As house prices are now back to 2006 averages in the UK, there has been an increase in the number of mortgages with a high loan-to-value.

In the working paper that looked at how mortgage debt is distributed, the bank examined its affordability regime in two scenarios – business as usual and upside.

Upside of strong price growth

Where house price growth stays relatively stable, it would be business as usual with no change to affordability rules.

The upside scenario, where house price growth exceeds 7 percent a year but wages remain more stable, would mean the Bank of England loosening the rules around affordability so borrowers could access higher loan-to-value mortgages.

At the moment, house price growth in the UK is around 1 percent annually.

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