The Bank Of England has launched an early consultation into the potential impact of removing the Financial Policy Committee’s strict affordability test requirements that have been in effect for eight years.
The consultation, launched at the end of February, is exploring whether these rules may have stopped first-time buyers from getting onto the property ladder in the wake of rising house prices.
The rules in question, the 4.5 loan-to-income ratio limit and the affordability test that factors in a three per cent rate increase may have stopped up to 12 per cent of people from either getting a mortgage at all or being able to get a large enough loan for the home they want.
For example, if someone on an average UK salary of £28,704 attempted to look for mortgages in Liverpool for a property costing £200,000 (the overall average in the city according to Rightmove), they would need a deposit of over £70,000 to make up the shortfall.
These rules were not always in place, however.
Prior to 2007, mortgages were relatively easy to get a hold of, with deposit-free mortgages and self-certification mortgages being options to enable people on low or unstable incomes to get onto the property market.
Part of the reason for this was the popularity in the financial world of mortgage-backed securities, which were packages of mortgages that could be traded on and during a housing bubble in the United States were seen as highly desirable investments.
This ended dramatically in 2007 with the subprime mortgage crisis, where people who were sold mortgages on the assumption they could refinance at better rates were forced to default, which started a chain reaction that led to a worldwide market meltdown.
To stop this from ever happening again, the Bank of England tightened their rules considerably, but in practice, this has stopped borrowers from being able to get mortgages entirely, especially given the house price increases seen over the past two years.
The consultation is set to continue until May 2022.