Why has the mortgage affordability test been withdrawn?
When the test was initially brought into place in 2014, interest rates were forecast to rise to over 2 per cent over the next 5 years. However, in hindsight this seemed unlikely that this level would be reached within the time frame.Following a review earlier this year, the BoE decided to scrap the test, as it was no longer needed and keep the loan to income (LTI) ‘flow limit’, as this has a wider assessment of affordability.
Is removing the affordability test beneficial?
The change has been put in place to help maintain the stability of the UK’s financial systems, but in a simpler way.The removal of the test is beneficial to borrowers who may have found it difficult to get a mortgage whilst the previous test was in place. However, it must be noted that this does not mean that you will be able to get any mortgage you wish, lenders will still be looking at your financial status and ability to meet the mortgage repayments.
The key advantage of the removal of the check is that lenders will no longer have to check whether you can afford mortgage payments at the higher interest rate.
Loan to income test remains
However, the rules still remain in place to stop homeowners from borrowing more than they can afford - including the loan-to-income ‘flow limit’. There is a risk that with fewer restrictions, some buyers will take out loans that they are unable to afford, which is why it is integral that you plan ahead before going ahead with a deal that you can’t manage.The LTI is a restriction on how much buyers are able to borrow in relation to their annual salary. It works to limit the number of mortgages that can be extended to borrowers at LTI ratios at or greater than 4.5 the amount of their annual income.
There are a few ways you can plan ahead effectively to give yourself a good buffer to budget effectively for your first mortgage:
- Budget: Budgeting wisely is key. Being aware of all your regular outgoings will help you to find areas that are non-essential, so you can then cut back on these and save more money towards your repayments.
- Be aware of all involved costs: When buying a home, the deposit and repayments are not the only costs you will come across. You’ll need to factor in legal fees, mortgage fees, the cost of furnishing your home or having work done, and more.
- Look into government schemes: Don’t go it alone, there are government schemes that can help you with your first home purchase.
- Speak to a mortgage specialist: Mortgage specialists are here to help you with everything you may be unsure about. For expert advice on how to get the right mortgage for you, speak to one of our team here.
