Bank of England plans to remove interest rate rule for mortgages
Bank wants to scrap rule that borrowers must be able to afford rate rise of three percentage points.
The Bank of England has announced plans to ease mortgage lending rules in a move that could help thousands of first-time buyers get on to the property ladder.
The central bank said it wanted to remove a requirement that forces borrowers to be able to afford a three-percentage-point rise in interest rates before they can be approved for a home loan.
Scrapping the requirement could help 1% of renters in Britain – about 50,000 people – who are not able to meet the affordability test. A further 6% of mortgage borrowers – about 35,000 people – would also have been able to secure a bigger loan if the rule had not been in place.
In a development that comes amid a house price boom during the pandemic, the Bank said a rule limiting some new lending to 4.5 times a borrower’s income, as well as separate affordability criteria set by the Financial Conduct Authority, were sufficient to guard against excessive risks in the mortgage market.
BoE’s relaxation of the affordability requirement could help thousands of first-time buyers get on the property ladder.
It will consult on the change in the first half of next year, as part of an overhaul to measures first introduced in 2014 after the 2008 financial crisis to curb excessive risk-taking by high street lenders.
Andrew Bailey, the Bank’s governor, said scrapping the affordability requirement should not be regarded as a relaxation of lending standards, as the rule limiting some new mortgages to 4.5 times a borrowers’ income was the main constraint on riskier lending.
“We don’t regard it as a relaxation of the rules, rather as an efficiency point, because having now got a body of evidence running back seven years or so now, we were able to take a much more substantial judgment on the effectiveness of the tests,” he said.
The Bank said that it would force lenders to hold about £11bn of capital to guard against future shocks by reintroducing its “countercyclical capital buffer”, a rule which forces banks to have a sufficient cushion of capital to absorb losses. The buffer will be set at 1% with a 12-month implementation period.
It said it expected to announce a further increase in the buffer to 2% – equating to about £22bn of capital – if the economy continued to recover as hoped between now and the middle of next year.
Threadneedle Street cancelled its stress tests last year during the first wave of the pandemic, saying that bank resources should be aimed at supporting households and businesses through the emergency.
The tests, first undertaken in 2014, were developed after the 2008 financial crisis to determine whether the UK’s biggest banks could keep lending during a recession.
from a piece by Richard Partington Economics correspondent of the Guardian 13th December 2021