Changes to mortgage affordability rules mean buyers may be able to borrow more money, decreasing the amount they need to save for a deposit, However, the new flexibility comes with trade-offs, according to experts.
A relaxation of mortgage guidance from the Bank of England this March means lenders no longer have to apply very rigorous tests to check their customers can afford the mortgages they are lent, which means some can borrow more money.
Some banks have already relaxed their rules, and allowing buyers to borrow more money could mean some could lead to a “widening pool of buyers”, according to analysis by Savills estate agency.
But experts suggest that the changes could come with some potentially negative consequences for first-time buyers too.
The i Paper spoke to experts to find out what these could be.
Following a change in Bank of England guidance in March, lenders are no longer required to stress test borrowers at the standard variable rate plus 1 per cent if borrowers take on a mortgage fix of less than five years.
Mortgage stress tests are designed to help prevent a repeat of the 2008 financial crisis by ensuring borrowers could afford their mortgage repayments even if interest rates increased significantly, but there have been suggestions from some that they are too stringent.
Broker Nick Mendes of John Charcol said many lenders had already started easing their approach after the Bank withdrew the formal affordability test last year, but said the most recent change could still give them more flexibility to stretch affordability.
A change by NatWest for example means a typical family would be able to borrow £33,000 more for a mortgage.
Could the changes help first-time buyers?
Savills suggests that the relaxed criteria could help some first-time buyers to buy their first home.
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By allowing them to borrow more, it could allow some those with lower incomes to buy homes that would otherwise have been out of reach.
At the same time, it acknowledges some of the extra capacity to borrow money could feed through to higher house prices.
In one scenario, if only 50 per cent of extra borrowing was passed on via higher house prices, then Savills’ analysis suggests the average deposit needed by a first-time buyer would drop £13,000 and the number of first-time buyer transactions could rise by 24 per cent.
Emma Fildes, property adviser at Brick Weaver, said areas that are currently deemed still affordable are likely to be hit by higher house prices.
She said: “We’ve seen buyers increasingly move further afield; to commuter belt towns and northern regions, boosting prices.
“This will only exacerbate this further and maintain the status quo in less affordable locations, where prices will tick along till further rate cuts contribute to their growth too.”
But could it make it harder for some?
In other scenarios, more of the increase in borrowing capacity could be passed on to house prices.
Although house prices are the highest they have been for a while, Mendes said, “If people can borrow more, they can offer more, and sellers will adjust their expectations accordingly”.
Savills notes that in a different scenario, where 75 per cent of additional borrowing capacity is passed on to house prices, house prices could rise by £19,425, or 7.5 per cent.
In this scenario the number of first-time buyers may rise, but by a smaller rate.
But even if the number of first-time buyers does rise, the rule change is not all positive, according to some experts.
Mendes explains that lower earners or those with less stable financial situations could find the rule changes pose problems.
For those in unstable financial situations, taking on more borrowing could be a risk. If their income drops, they could find it harder to continue to repay their mortgage, which will be greater if they borrow more.
Speaking to The i Paper, Mendes said: “We could see the biggest price impacts in areas where affordability was already tight, but demand remains strong, such as parts of London, the South East, and more competitive urban markets.
“Meanwhile, in areas where incomes are lower, the uplift in affordability might not go as far, but price pressures could still build simply because there is more headroom in the system.
“So, while this rule change might help some borrowers, especially those who were just short of affordability thresholds, it could also widen the gap between those who can stretch and those who cannot. For first-time buyers already struggling with deposits and high living costs, that is not necessarily good news.”
Fildes also warned that pushing up house prices by allowing borrowers to take on more debt could cause risks for first-time buyers if house prices subsequently fall in the future, for example in the event of an economic shock.
She explained these buyers could be left in “negative equity” – a situation whereby their home is worth less than the amount they have still have outstanding on their mortgage.
This can pose problems with selling the home, as usually a sale is used to repay the bank the amount owed on the mortgage.
If a sale cannot provide this money, the seller has to repay the bank from their own pocket.
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