The review by the Financial Policy Committee comes amid concerns that first-time buyers are struggling to get mortgages.

The Bank of England is reviewing mortgage lending rules which could make it easier for first-time buyers to get on to the property ladder.

Its Financial Policy Committee (FPC) is looking at whether the affordability criteria that borrowers must pass in order to qualify for a mortgage is still appropriate.

The rules, which limit the amount people can borrow relative to their income and ensure homeowners could still afford repayments if interest rates jumped by 3%, are thought to have impacted first-time buyers particularly hard.

The review comes as the number of mortgages available to people with only small deposits has nosedived, with lenders responding by becoming more risk averse in the face of the Covid-19 pandemic.

“Mortgage credit conditions remain tighter than at the start of the year, particularly for high loan to value mortgages,” according to FPC meeting notes in December 2020.

“This reflects reduced risk appetite from lenders due to the economic outlook, as well as operational constraints in meeting the current high demand for mortgages.”

The FPC is due to report its findings next year.

Why is this happening?

Since June 2014, the FPC has recommended that no more than 15% of mortgages advanced by individual lenders are awarded to people borrowing 4.5 times their income.

It also suggested lenders ensure borrowers could still afford their mortgage repayments when their deal ended. At this point, a lender is moved onto a reversion rate of repayment, which is typically 4.5% or higher if interest rates have risen by 3%.

The move was intended to protect the banking system from a high level of household debt following the financial crisis of 2008. However, the reforms were introduced at a time when interest rates were expected to rise by 2.25% during the coming five years.

The Bank of England base rate currently stands at a record low of 0.1%. Interest rates are now expected to stay low for a longer period of time, making it easier for borrowers to service their debts and meaning the current affordability rules may no longer be appropriate.

Who does it affect?

The review of lending rules is good news for first-time buyers who are more likely to struggle to meet the affordability tests than those who have high levels of equity in their home.

Although the FPC said there was no evidence that the current rules had limited mortgage availability, it pointed out that credit conditions had tightened recently, particularly for people with only small deposits, while rates on these mortgages were also higher.

There are currently only eight mortgages available for people with a 5% deposit, compared with 391 in March this year, while the number of different deals for people with 10% deposits has dropped to 88 from 779 during the same period, according to Moneyfacts.

At the same time, the average two-year fixed rate paid by people borrowing 90% of their home’s value has increased by 1.17% during the past year.

What’s the background?

The review comes after Prime Minister Boris Johnson promised to help first-time buyers by increasing the availability of mortgages for people with small deposits.

In his speech at this year’s virtual Conservative Party conference, Johnson announced plans for a new scheme for people with 5% deposits, in a bid to turn “generation rent into generation buy”, although further details were not given.

Meanwhile, the government’s flagship Help to Buy equity loans scheme will be available to first-time buyers from April next year, but applications open on 16 December.

The scheme enables people to purchase a new-build property with a 5% deposit which the government tops up with a five-year interest-free loan.

Top three takeaways

  • The Bank of England is reviewing mortgage lending rules which could make it easier for first-time buyers to get on to the property ladder

  • It is looking at whether the affordability criteria that borrowers must pass in order to qualify for a mortgage is still appropriate

  • The review comes as the number of mortgages available to people with only small deposits has dived as lenders become more risk-averse in the face of the Covid-19 pandemic. 

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