You grow up, you get married, you buy a house … It’s all apart of growing up. However many young people are finding it impossible to get on the property ladder and with prices raising it’s getting more difficult for them to do so. This is leaving the younger generation doomed to be generation rent for many years to come.
Many young people find it hard to even save for a deposit at the moment with many opting to live with their parents, or reside in HMO’s where the bills are paid for so their outgoings are less.
If you’re one of the lucky ones and managed to save up a 5% or 10% deposit then you have the banks stress test to pass. The stress test means borrowers have to prove they could still afford their mortgage repayments if their mortgage rate was to increase to 3 per cent above their lender's standard variable rate.
Following the latest review of the mortgage market, the central bank’s financial policy committee confirmed that from 1st August 2022 the stress test will be withdrawn. The test was part of recommendations introduced in 2014 in the aftermath of the financial crisis to guard against a loosening in mortgage underwriting standards and an increase in household debt.
Adding 3 per cent to borrowers on a fixed rate and with SVR’s already higher then these, the move was criticised as being unrealistic. Removing the affordability stress test means the average borrower will no longer be assessed on whether they could potentially afford an inflated interest rate of 3 percentage points.
Currently, Lenders are taking higher bills into account when assessing what borrowers can afford to pay each month toward their mortgage. Santander, for example, has already factored increased national insurance, household expenditure and dividend income tax rates into its affordability calculations. Others are expected to follow.
Chris Sykes, Technical Director at mortgage brokerage, Private Finance said: 'Recently we have seen many lenders altering their affordability calculators, both due to the rising costs of living as well as the rising interest rates that we are seeing.
'This morning’s news release detailing they are withdrawing their stress testing recommendations is great news for borrowers that were becoming increasingly tight on affordability and it is limiting their borrowing power with each change to affordability calculators.'
What will the removal of the stress test mean?
Although on paper this does sound like a great plan and hopefully open otherwise closed doors for more people to get their foot on the property ladder, this decision has raised fears that it could lead to irresponsible lending and enable people to borrow beyond their means.
However, the impact may not be as great as some fear. The affordability stress test has caused just 6 per cent of people to take a smaller mortgage than they otherwise might have, according to the Bank of England. This equates to roughly 30,000 mortgages a year.
Mark Harris, Chief Executive of mortgage broker SPF Private Clients, says: 'Scrapping of the affordability test is not as reckless as it may sound.
'The loan-to-income framework remains, so there will still be some restrictions in place; it is not turning into a free-for-all on the lending front.
'Lenders will also still use some form of testing but to their own choosing according to their risk appetite.'
Furthermore, these affordability checks have also been blamed for stopping some first-time buyers taking out mortgages that would be cheaper than their rent.
Harris adds: 'It could have a positive impact on certain borrowers who have been disadvantaged when it comes to getting on the property ladder. For example, first-time buyers who have been affording rents far in excess of actual mortgage payments but have failed affordability assessments regardless.'
Lenders to relax the loan-to-income limits?
At present, the regulatory requirement is that lenders only offer a certain number of loans over 4.5 times the borrowers annual income.
Halifax’s latest data showed house prices rise again in May with the average house price reaching another record of £289,099. Meanwhile, regular pay fell by 2.2 per cent from February to April - adjusted for inflation - according to the ONS.
The average house price is now worth almost nine times the average income.
Sykes said: 'Buying power has reduced especially over the last two years and buyers cannot afford the same sized property or number of bedrooms they once could.
'With this in mind we wonder, could we see a proportion of lenders starting to reach these regulatory limits?
'We have seen more flexibility from lenders over the last few years during periods of large house price growth to help borrowers, however we are starting to question how much longer can this be sustained considering the current rules, unless these regulations are flexed to reflect the current climate.
'With house prices soaring and affordability concerns, maybe there needs to be more flexibility regarding this regulation and for the percentage of loans above the 4.5 times income to increase in order for more people to get onto the housing ladder.'
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