Looser mortgage rules will add £17,000 to price of a starter home

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First-time buyers could borrow tens of thousands of pounds more if the Bank of England goes ahead with plans to loosen its lending rules.

Threadneedle Street is understood to be considering relaxing affordability checks that banks make to check if a borrower can keep up with repayments.

Currently, banks and building societies must be satisfied a borrower could keep up repayments if the loan’s “reversion rate” kicked in, which is typically their bank’s standard variable rate, plus an additional three percentage points. 

The stricter rules were introduced in the wake of the financial crisis, and were designed to ensure borrowers are not too vulnerable to higher interest rates.

This stress test translates to lending up to five times a borrower’s income, according to analysis by Capital Economics. 

But if the affordability rules were eased to cover that reversion rate plus two percentage points, average borrowing power would increase to five-and-a-half times income – equivalent to being able to borrow 10pc more. 

If the rule changes take effect they will help all borrowers, but will especially benefit first-time buyers who have typically stretched to get on the property ladder.

For first-timers, this would increase their budget by more than £17,000. They currently borrow an average of £172,000 according to the Office for National Statistics.

Those buying in London, where the average first-time mortgage is £309,000, would be able to borrow an extra £31,000.

Economists have warned that relaxing the lending rules risked creating a housing bubble by propelling property prices to “unsustainable levels”.

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