Mortgage rules changed in August 2022, in theory making it easier for homebuyers to prove they can afford a mortgage and get onto the property ladder.
Many people find it impossible to buy a home due to current stringent affordability checks. The government changed these rules in the summer of 2022, with the aim that more people will be able to own their homes in future.
Here, we explain which rules changed, and whether this is likely to boost your chances of getting a mortgage.
Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
Which rules are being scrapped?
There used to be two main safeguards that lenders must use to ensure mortgages remain manageable and that people don’t end up with more debt than they can afford to repay.
These are the ‘loan to income (LTI) flow limit’ which essentially caps the number of mortgages that lenders can offer which are at or higher than 4.5 times a borrower’s income; and an ‘affordability test’.
The affordability test was designed to check that borrowers can not only cover their mortgage costs now, but also if rates rise in future. The ‘stress’ interest rate used was typically three percentage points higher than the ‘reversion rate’, usually the lender’s standard variable rate, that borrowers roll on to when their mortgage deal finishes, unless they remortgage.
So, for example, imagine you wanted to take out a two-year fixed rate mortgage at 4.89%, and when it finishes, the reversion or standard variable rate is 6.40% your lender would check that you could afford monthly payments at a rate of 9.40%. Those who couldn’t prove they’d be able to afford payments at the higher stress test rate were likely to be refused a mortgage.
This affordability test was removed from August 1, 2022, in theory making it easier for buyers to get a mortgage, as they’ll no longer have to prove they can afford much steeper rates in future. The loan to income flow limit, however, will remain in place. However, that is not to say that stress tests will no longer apply, as it is now down to lenders to set their own stress test limits. In some cases this rate may be much lower than the rate plus 3% but in some cases it could be higher. All lenders must still stress test at 1% above the rate they expect mortgages to be during the term of the mortgage.
The decision to remove the 3% stress test was criticised by many commentators, who argue that the whole point of the affordability checks is that they are there to avoid a 2008-style credit crunch.
Nigel Green, of financial advisory group deVere Group, said: “To scrap this important check to try and ensure borrowers don’t take on more debt than they could afford, at a time when rates are rising and the UK is facing a significant economic downturn, is utter madness.
“Some might argue that the risks are pretty low, given the loan-to-income rules remaining intact, but they are risks nonetheless that borrowers and the UK economy can do without.”
Will the rule change help me get a mortgage?
Although removing the affordability test should make it easier for homebuyers to prove they can afford a mortgage, the big sticking point for most buyers remains steep house prices, which most people’s incomes can’t possibly keep up with.
According to Halifax, in the first three months of 2022, the cost of a typical UK home was £279,431, while the average annual earnings of a full-time worker were estimated to be £39,402. This puts the house price to income ratio at 7.1, the highest (or least affordable) level ever recorded.
Back in 2007, the last time UK house prices experienced such sustained growth in house prices, average earnings were £30,508 and the typical house price was £194,207. This generated a house price to earnings ratio of 6.4, the bank said.
Andrew Asaam, mortgages director at Halifax, said: “There’s no question that the economics of buying a home have changed significantly over the last couple of years. Soaring property prices and slower wage growth have combined to stretch traditional measures of housing affordability.
“With interest rates on the rise as a means of combatting inflation, it’s unlikely that house prices will continue to grow at the pace we’ve seen recently. This should see the gap between average earnings and property prices narrowing over time.”
Soaring prices aren’t the only issue, as buyers also need to pull together a deposit which is equivalent to at least 5% of the property value. Based on an average house price of £279,431, this would mean saving nearly £14,000, and that’s before factoring in other mortgage fees and moving costs. Find out more about these in our guide Mortgage fees and costs explained.
Buyers aged 50 and above may also be worried about being accepted for a mortgage, especially if they need it to take them into retirement when their income is likely to fall. However, there is a growing range of options available to homeowners in this age bracket, which you can read more about in our articles Mortgages for over 50s: What you need to know and Mortgages for over 60s: what you need to know.
Will it become easier to get a retirement interest-only mortgage?
Changes to mortgage affordability rules unfortunately aren’t likely to make it easier to take out a retirement interest-only mortgage.
Rather than having a set term, retirement interest-only mortgages enable you to carry on making interest payments indefinitely, with the loan paid back only when you die or move out. In contrast, a standard interest only mortgage finishes on a specific date and you must repay the capital you owe by this date. You can find out more about how retirement interest-only mortgages work in our guide How retirement interest-only mortgages work
One of the reasons it’s not always easy to qualify for a RIO mortgage is that If a couple is looking to take out a mortgage together, then due to RIO affordability tests, each applicant must be able to demonstrate that they’ll be able to cover the monthly interest payments on their own. This is so that when one of the borrowers dies, the lender will have peace of mind that the other will be able to keep up the mortgage repayments. The difficulty with these tests, however, is that often one applicant has a much bigger income than the other, which can significantly reduce the amount they can borrow overall.
There are calls for these rules to be changed and for the sale of the property to be considered as a long-term repayment plan in the event of one partner dying. This would mean that individual borrowers would no longer have to demonstrate that they’d be able to cover monthly payments on their own.
If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
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