Young people are being denied mortgages they could pay due to affordability regulations, says Building Societies Association.
Many first-time buyers are being frozen out of homeownership by tough affordability rules introduced following the financial crisis.
Young people paying rent of £800 a month are being denied mortgages with repayments of just £500 a month on affordability grounds, according to a report commissioned by the Building Societies Association.
It warned that the situation was creating ‘rental prisoners’ and urged the regulator to work with the industry to change the rules or help lenders develop solutions to work around them.
The report said: “Such a level of prudence risks freezing many would-be first-time buyers out of homeownership.”
Why is this happening?
In 2014, tighter affordability rules were introduced as part of the Mortgage Market Review to help prevent reckless lending, which was seen as a contributing factor to the financial crisis.
In the past, the amount lenders would advance was based on multiples of a borrower’s salary, typically three times their annual pay for a single buyer and 2.5 times their income for a couple.
However, in the run up to the financial crisis some lenders were advancing as much as six times people’s annual pay.
Under the new rules, lenders not only have to take into account how much someone earns, but they must also apply a stress test to see if they would still be able to afford their mortgage if interest rates rose or if they lost their job.
This tighter affordability criteria has led to situations where potential buyers are getting turned down for mortgages, even though their monthly repayments would be significantly lower than the rent they currently pay.
Who does it affect?
The rules are bad news for some first-time buyers, as they find themselves trapped paying high rent after being rejected for a mortgage.
People trading up the property ladder can also fall foul of the stress test, under which lenders assess whether they could still afford repayments if interest rates rose by 3%.
Lenders find the criteria frustrating too. The report pointed out that they have to assess whether borrowers could afford repayments if interest rates rose in the future, but they are not able to take into account likely income growth during the period.
It added that the Bank of England had repeated said any rise in interest rates was likely to be incremental, while long-term interest rate projections were nowhere near the level currently applied in the stress test.
What’s the background?
The call to regulators to review the test was one of a number of proposals put forward in the report to help more young people get on to the housing ladder.
It also suggested that 100% mortgages should be brought back for borrowers, as long as appropriate parameters were in place.
With a third of first-time buyers currently receiving support from the so-called Bank of Mum and Dad, it also urged lenders to develop products to enable parents to help their children buy a property in ways other than just giving them the deposit.
Top 3 takeaways
- Many first-time buyers are being frozen out of homeownership by tough affordability rules introduced following the financial crisis.
- Young people paying rent of £800 a month are being denied mortgages with repayments of just £500 a month on affordability grounds.
- The regulator should work with the industry to change the rules or help lenders develop solutions that work around them