Bank Of England To Drop Mortgage Affordability Test From 1st August

I'm struck as between this is a good idea in that people whose rent is more than their intended mortgage payment, may now be able to get a mortgage. And this will fuel mad increases in property prices caused , self cert mortgages, and lenders , lending recklessely as they try to grow their mortgage books.

I dont know what the BoE driver is in doing this?

Most banks will still check that you genuinely earn what you claim to and will still go through your bank statements to look out your outgoings as they always did that.  What they’ll drop is the stress testing to ensure you can still pay if your interest rate increases by a factor of ten.

Good point proboner, and Roger. I was discussing this with friends and families this weekend how there are Millions of people resigned to never owning a place despite earning 50k plus , or paying 2k a month rent but cannot get a mortgage where the payments are 1400 quid a month .

Yeah it's only the stress test for interest rate rises that is being dropped. I think that required them to look at a 3% rise in rates.  That seems less necessary as rates have already gone up a fair bit.   It's not so much new buyers that is the issue as the remortgage market you had this completely insane situation where people couldn't get off a SVR of (say) 3% and on to a floating rate of (say) 2% because they couldn't pass an affordability assessment at 5%. That was just completely insane. 

The mortgage market is going to tighten significantly again anyway just due to market conditions/the coming recession. 

rogermellie20 Jun 22 08:17

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It's ludicrous that people can pay 900 rent but be told they can't afford a mortage of 750....
 

but is it? If you fail to pay your rent then you are in breach and may lose the tenancy but if you fail to pay your mortgage then when you are in default you may be facing proceedings for enforcement of the capital loan so you lose the property and have a huge debt. That’s why the affordability issues are more serious for a secured loan. 

DDS, I would suggest most people would struggle with rates rising from 1% to 3 % plus, surely?

Why do you think the mortgage market will tighten significantly , and in what respect will it tighten

Muttley, reposession is the last , last resort for. any lender. And even when they start posession proceedings , thelender will fall over themselves to form a repayment plan. And Courts will almost without exception find away to prevent the baliffs going in. I did a bit of work back in the day LPC Law, post the BVC, as did friends. They did a huge amount of mortgage reposession work, and it was common for cases to be listed 20/30/40/times over years before the Court granted posession. The Court would always almost rule in favour of the Court.

The banks are tightening up their assumed outgoings. 

In effect when you enter information about outgoings and income, the banks check that against both their own estimates of outgoings for someone in your circumstances and the credit reference agencies’ estimate of your income. If what you input gives you greater affordability than their own calculation, they use their own not yours. 

With the increase in petrol, energy and food costs, the banks estimated outgoings are increasing, so more people will fall into the bank’s own affordability calculation and then be declined due to affordability concerns. 

Ebitda - the point about the stress test was that rates were at historic lows and there was the potential for the interest component of repayments to escalate hugely as a result. As rates rise some more of that risk has come to pass already and there is (arguably) less need to protect against future rate rises.

The mortgage market is going to tighten because the whole world is going 'risk off' as we go into another sharp downtown. The mortgage market always tightens when that happens.  There is a significant risk of house price falls as well (although I personally doubt there will be much in the way of nominal house price falls, inflation will do that work). Still valuers are getting nervous again and lenders are not assuming that a 90% LTV is fine because in two years it will be 75% in the same way they might have done 3 or 4 years ago. 

Splish, there will still be dozens of lenders looking to increase their book, and many will have a much more relaxed view. When I bought my first place , not that long ago, the lender noted I was drawing a lot of cash out of my current account, but they never asked why! I put 10% down, with no accounts, and it went through in 2 weeks! 

This lender apparently just rubber stamped John Charcoal applications, save in exceptional circs. I'm trying to buy a BTL, or get a mortgage as second home. I have a large deposit, but its all such a ball ache, its untrue.

I think there is huge nervousness in the BTL lending market right now.  Nobody wants to take on first time landlords in particular with everything that is going on in the sector at the moment. 

Splish, there will still be dozens of lenders looking to increase their book, and many will have a much more relaxed view
 

But they will charge a higher rate for that to cover their increased lending risk, higher outgoings on arrears management etc compared to the prime lenders.

Given most people think of their mortgage as a monthly payment not a capital sum, if interest accounts for a higher proportion of the monthly payment many will just reduce their budget to keep the monthly payment at the level they want. 

Donny, the relative value of house prices only falls as a result if inflation if wage inflation follows prices.

That isn't going to happen this year and real wages are actually going to shrink which actually makes house prices even less attainable. 

So the only way house prices fall through inflation is if asking prices come down because people can't afford them.

ebitda20 Jun 22 08:40

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Muttley, reposession is the last , last resort for. any lender. And even when they start posession proceedings , thelender will fall over themselves to form a repayment plan. And Courts will almost without exception find away to prevent the baliffs going in. I did a bit of work back in the day LPC Law, post the BVC, as did friends. They did a huge amount of mortgage reposession work, and it was common for cases to be listed 20/30/40/times over years before the Court granted posession. The Court would always almost rule in favour of the Court.

 

 

I know. I spent 10 years as head of litigation in a major bank with a huge home finance business.That's not the point. It creates the liability that a rental arrangement does not.  Fail to pay rent and you owe rent. Fail to pay a mortgage and you have a secured loan in default.  different.    A law point. Hence safeguards in respect of secured lending - the suitability of the loan to circumstances - are quite different to an individual's right to sign a lease as he or she see's fit.

Donny there were stress testing far harder than that.  I've seen mortgage offers warning people about what the payments will be if the interest rate rises to double digits.

If you owe rent and a possession order is granted , you still have a liability to pay the accumulated arrears , post posesssion though.

Yes, but I was just making the point that that's a simple debt not a debt secured against the value of the property

SummerSails20 Jun 22 09:42

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Donny there were stress testing far harder than that.  I've seen mortgage offers warning people about what the payments will be if the interest rate rises to double digits.

Pretty sure those were just warnings though, not actual stress tests they were required to make a lending decision against.  I agree the system was very box ticking. 

AITS - the wage growth will come soon enough. Perhaps not for everybody but for most people with the financial capacity to buy a house. The skilled labour market in the UK is still quite tight I reckon. 

"I'm struck as between this is a good idea in that people whose rent is more than their intended mortgage payment, may now be able to get a mortgage. "

Why would people whose rentis higher than their intended mortgage not be able to get a mortgage at present? Surely the affordability test goes off your intended mortgage payments?

but in principle I think it's a good idea

let banks make their own decisions

and self cert mortgages are a good idea (and AFAIK still exist)

Our mortgage payments when we engidge will be considerably less than we are paying right now in rent. Probably about 50% less because we will have a phat deposit,

Self-cert are fine with some basis checks.  I worked on the administration of an insolvent bank and one case came up of a gardener who'd self-certified a salary of £100k in the early 2000's.  Apparently that didn't ring any alarm bells in the bank.

Say you default on a rent liability of 1000 per month. Landlord shows patience but after six months he terminates, notice of eviction served. Claim against you is 6000 plus some associated costs. 

Say you default on a mortgage of 300k. After a year or two of being in and out of court, a staged payment plan not honoured, further default and another year of litigation etc the bank gets a possession order.  You owe the bank best part of 300k plus costs. You lose title to the property 

Yes you owe the bank 300k ,LESS proceeds of sale.

How about, you pay 2k PCM in rent, haven't paid for 18 months, and the landlord commences proceedings for 36 k in rent arrears. Both parties rock up at court, but the Landlord has not complied with his duty to provide a how to rent guide, which is a statutory requirement. No posession order can be made, and the landlord has to start over again.

Back in court 6 months later, and the landlors has failed to protect the deposit, no posession order and the landlord has to start over again. This can and does happen loads, unless the landlord has given a raft of documents at the outset, protected the deposit, provided an EPC certificate, provideded PAT tests, and much more there can be no posession order. By that time you might be owed 40 k plus

I was going to say, you’re only going to owe the bank 300k if they sell your house for almost nothing.

Mortgage loans should be asset recourse only, as they are in France. No personal debt, if you enforce all you get is the house chztxbai

Also, Donny I don't think there will be a big bump in wage growth this year in part because decision makers are shitting it about a recession and in part because people are making passes of extra profit out of the current inflation they are just keeping up with the massively increased costs of sales.

You do. A mate of mine who is a succesful sparkie, but lives way beyond his 75k a year means had his flat reposessed , and there was an excess of about50 k from the proceeds of sale. He kept the excess, and it put him back on his feet. He says it was financially the best thing the lender taking the property back.

He's now buying a new place 8 years later

ebitda - re your post at 10.40am today; is the How-to-Rent Booklet requirement necessary for a Section 8 (fault based) eviction? 

Indeed you can get lucky and be repossessed and get something back but remember once you get into default the bank starts charging penalty interest and all of their additional costs so your £300k loan to buy a £400k flat can rapidly turn into owing the bank £400k and a shortfall once they've sold it and added the sale costs to the tab.

and they'll sell it at auction for a quick sale so won't get the same price you might expect by flogging it through Foxtons