Potential plans to withdraw the Bank of England’s mortgage affordability test are welcomed but could present future risks to the market, Kevin Roberts, director, Legal & General Mortgage Club has warned.
Yesterday the Bank of England opened a consultation which could see the test removed from next year.
However, Roberts has warned that this could add additional fuel to an already bouyant market and create a cycle of spiralling prices and further affordability prices.
The L&G boss also warned that the move should not be looked at in isolation and be part of wider measures aimed at rectifying systemic issues in the market – such as supply constraints.
He said: “As it stands, to be accepted for a mortgage a prospective borrower must prove that they could still afford their mortgage repayments if their product’s interest rate was to rise by 3% above the reversion rate.
“This means rates well above typical 2- or 5-year offers and loosening this rule could help more borrowers to step onto the property ladder (particularly first-time buyers).
“Lenders also have a cap on how much business they can write above 4.5 loan to income (LTI) and removing this again could help buyers, especially in areas with higher average prices.
“Whilst welcome, the proposal is certainly not without risk. The move is likely to find overwhelming support from would-be buyers already facing record house prices, however there is a risk some overstretch themselves and if house prices fall, find themselves in negative equity.
“The bigger risk however is the opposite of this in as much as any changes provide further stimulation to an already buoyant market, fuelling further house price growth which could ultimately put would be house hunters back in the same position of unaffordability.
“Advice from an independent mortgage adviser would be a good first place to start for anyone hoping any changes could help them.
“The consultation is welcome but maybe should also be aligned with ways to boost housing supply, if we really are to help first-time buyers.”
