A major mortgage overhaul coming in days – and it could mean you can borrow MORE
HOME buyers may soon be able to borrow more as a major shake-up to mortgage rules takes effect on Monday.
Affordability tests that determine how much you can borrow for a mortgage are dropped from August 1.
Currently, mortgage providers must follow rules set by the Bank of England regarding how much homebuyers can borrow.
But these are rejected after consultation with the Bank.
It comes as UK house prices hit a record high of £283,000, a 12.8% increase in a year.
And while being able to borrow more may help more people get on the homeownership ladder, there are fears it could encourage buyers to take on too much debt.
Affordability tests were introduced in 2014 and aimed to determine the level of monthly mortgage repayment buyers could afford.
According to the rules, providers use “stress tests” to determine whether buyers could cope if interest rates rose and their payments increased.
As part of the test, buyers must prove they can still afford refunds if they exceed their provider’s reversion rate by 3 percentage points (the interest rate you switch to once your fixed agreement ends ).
A so-called Loan to Income (LTI) “flow limit” will remain in place, however – this states that buyers can only borrow a maximum of 4.5 times their income.
Experts said the changes could mean more people find it easier to get on the property ladder and could potentially take out a bigger mortgage.
But it’s important not to overwork yourself and take on more debt than you can afford.
Laura Suter, personal finance manager at AJ Bell, said: “It’s not because you box borrow more, it doesn’t always follow that you should.
“Before going into debt, you really should consider how much you can afford to pay back and whether you could afford it if your circumstances were to change, such as if you lost your job.”
The change comes just days before the Bank of England is expected to raise interest rates again.
Rates have already risen from 0.1% a year ago to 1.25% – the Bank’s committee will meet on August 4 to decide whether to raise them further.
Every time rates are increased, homeowners with a tracker or adjustable rate mortgage see their monthly repayments increase.
If you come to the end of a fixed rate mortgage contract, you will find that the rates are also considerably higher than last time.
This could put further pressure on household finances in the cost of living crisis, as inflation climbs to 9.4%.
So it’s important for homebuyers to shop around for the best deal and think carefully about how much mortgage debt they can comfortably carry.
Laura added: “Mortgages can be complicated at the best of times, so it’s worth seeking advice from an independent broker to find the best deal and advice on your repayments.”