Savills have just published a well-researched article a bout the new affordability tests introduced by the Bank of England in June. They were designed to ensure financial stability rather than to control the property market and subdue house price growth. However, further to the regulatory changes set up by the mortgage market review, the Bank’s latest set of measures looking increasingly likely to rein in the more bubbly parts of the housing market and curtail the growing number of first-time buyers.
Under the new rules brought in by the Bank’s financial policy committee, lenders are required to assess whether borrowers could still afford their mortgages if, at any point over the first five years of the loan, rates would be three percentage points higher than the rate at origination. Mortgage lenders are also required to limit the proportion of mortgages at 4.5 times income above to no more than 15% of their new mortgages. These latest changes are far more prescriptive than the tighter lending rules introduced by the Mortgage Market Review in April which required a stress test but did not set a rate. Furthermore, the UK banking sector is currently undertaking a particularly stringent collective stress test, which examines the resilience of banks should house prices fall by around 35%. The exercise is to be completed by the end of the year.
I think this is a good article as these factors will and are impacting on the property market as the property market is controlled by the mortgage market: if mortgages are difficult to come by there will be less buyers. This can already be seen in the housing market when mortgages are becoming increasingly difficult to get.
The one sector which is being particularly affected is the market above £2 million, these are the mortgages which are proving difficult to pass the affordability test, as a lot of these people are putting large deposits down and maybe living off investments rather than income and the banks are failing to take this into consideration.
Richard Butler Creagh