Mortgage affordability rules relaxed
The latest move by the Bank of England to relax mortgage affordability rules should make it easier for first-time buyers to take out a mortgage.
The Bank of England has announced plans to relax mortgage lending rules from August 1 in a major boost for first-time buyers.
Borrowers currently have to show they would be able to afford repayments if their mortgage reverted to their lender's higher variable rate and interest rates jumped by 3%.
But after consulting lenders and other members of the industry, the Bank’s Financial Policy Committee (FPC) has said it will scrap the rule this summer.
The change is great news for first-time buyers, who were most likely to have been caught out by the rule.
It comes at a time when rising interest rates and high house prices are already making it challenging for people to get on to the property ladder.
Why was this rule introduced?
A number of new affordability guidelines were introduced for lenders in 2014 to protect the banking system from high levels of debt following the financial crisis in 2008.
The FPC called on lenders to make sure borrowers could still afford their mortgage repayments when their fixed rate deal ended and if interest rates rose.
As a result, lenders had to make sure that monthly repayments were still affordable if borrowers were moved on to their reversion rate – typically known as the standard variable rate – and interest rates rose by 3%.
The FPC also asked lenders to limit the number of mortgages they offered to people borrowing 4.5 times their income to 15% of their total lending.
Why is it being scrapped now?
When the rule was introduced, interest rates were expected to rise to 2.25% in the coming five years.
When the FCA first launched its consultation around lifting the rule, it seemed highly unlikely that interest rates would hit this level in the years ahead.
As a result, the FCA thought the test was no longer needed.
But since then inflation has soared to a 40-year high of 9%, causing the Bank of England to raise interest rates five consecutive times to 1.25%.
While that is still well down on the 2.25% anticipated when the test was introduced, interest rates are now expected to rise to 3%, or possibly higher, next year.
The average standard variable rate is already just under 5%. If interest rates rise by a further 1.5%, borrowers would have to show they could afford a mortgage rate of 9.5%.
For example, if someone was borrowing £180,000 on a two-year fixed rate mortgage with an interest rate of 2.5%, their monthly repayments would be £815.
But they would have to prove that they could still afford their mortgage if the interest rate was 9.5% and their repayments were £1,590 a month – almost double the amount they would actually pay.
Such a tough test would exclude many people from taking out a home loan.
While the FCA has not commented on this issue directly, it is thought to be one of the reasons it is withdrawing the rule so quickly after the consultation concluded.
Officially, it has said that the rule limiting the proportion of customers who can borrow more than 4.5 times their income and other affordability checks are enough to ensure lending is responsible.
Who does it benefit?
The decision to withdraw the rule is good news for homeowners who have borrowed a relatively high proportion of their salary and would need to remortgage in the next few years.
It is particularly good news for first-time buyers, who typically have lower salaries and smaller deposits, making them more likely to struggle with the test.
Capital Economics estimates that when the stress test interest rate was 6.6%, the typical mortgage customer was able to borrow five times their income.
But if the rate used for the stress test hit 9.5%, the maximum amount they could borrow would drop to just four times their income.
Around one in four people currently borrow more than four times their income, so if the rule had stayed in place, many people would have struggled to get a mortgage.
Key takeaways
- The Bank of England has announced plans to relax mortgage lending rules from August 1
- Borrowers currently have to show they can afford repayments on their lender’s higher variable rate if interest rates rose by 3%.
- The change is great news for first-time buyers, who were most likely to have been caught out by the rule
Mortgage lenders told to do more to help struggling borrowers
The Financial Conduct Authority has called on lenders to work harder to understand the cost of living problems people are facing. And to ensure they are offered the right support.
Mortgage lenders have been told to do more to help customers who are struggling with repayments in the face of rising interest rates.
Regulator the Financial Conduct Authority (FCA) has written to more than 3,500 lenders calling on them to take the time to understand individual customers’ circumstances and offer tailored solutions.
It warned that lenders should also only charge fees that are fair and cover their own costs.
In addition, the FCA said they should encourage mortgage customers to switch to less costly options where these were available, as well as helping them to access free debt advice.
The call was directed at all types of lenders, including those who offer mortgages, credit cards and loans.
Sheldon Mills, executive director of consumers and competition at the FCA, said: “Many consumers are feeling the impact of the rising cost of living in their personal finances and we expect this to increase over the next few months.
“Early action is important for those struggling with debt. We need all firms to get the basics right and provide good quality support.”
The letter comes as the Bank of England increased interest rates for the fifth consecutive time, raising the official cost of borrowing to a 13-year high of 1.25%.
Interest rates rise to a 13-year high
The move means two million homeowners on variable rate mortgages will see their monthly repayments rise by a cumulative £114 a month since interest rates first began to increase in December.
Why is this happening?
The FCA said they had looked into how borrowers in financial difficulties were being treated by lenders.
They found that some lenders were not providing the right support.
The FCA was particularly concerned that the most vulnerable customers were not being given the right advice.
It pointed out that with household bills expected to continue to rise into the autumn, it was important that firms put measures in place to ensure they were offering the best help to struggling customers.
What should I do if I’m struggling?
The regulator urged borrowers who were struggling to talk to their lender as soon as they can.
The FCA said lenders must offer a range of short-term and long-term options to mortgage customers who were facing difficulties.
These include:
- extending the mortgage term to make monthly repayments more affordable
- changing the mortgage type, such as converting from a repayment mortgage to an interest-only one
- offering a payment holiday, to give customers breathing room to get their payments back on track
But it stressed that this list was not exhaustive, and lenders should consider other options under appropriate circumstances.
What’s the background?
Despite the pressures households face from the rising cost of living, it should not impact the amount mortgage customers can borrow, according to research carried out by mortgage trade body UK Finance.
It found that while rising prices had led to homeowners facing a 3% reduction in their disposable income, they would still qualify for the same sized mortgage now as they did last year.
The finding is good news for borrowers, as they face strict affordability tests which look at their day-to-day outgoings when they take out a mortgage.
It suggests that people looking to remortgage should still be able to borrow the same amounts as they could before the cost of living hike.
Key takeaways
- Mortgage lenders have been told to do more to help customers who are struggling with their repayments
- The regulator, the Financial Conduct Authority, has told lenders to take the time to understand individual customers’ circumstances and to offer tailored solutions
- Lenders should also only charge fees that are fair and cover their own costs
Interest rates rise to a 13-year high
Nearly two million homeowners will face higher mortgage repayments after the Bank of England increased interest rates for the fifth consecutive time.
The Bank of England has increased interest rates for the fifth consecutive time, lifting the official cost of borrowing to a 13-year high.
Its Monetary Policy Committee increased the Bank Rate from 1% to 1.25% as it continues to battle the rising cost of living.
Three members of the committee voted to raise interest rates by an even more aggressive 0.5%, suggesting there will still be further increases to come.
The move means around two million homeowners with variable rate mortgages will see their monthly mortgage repayments rise.
The latest increase will add around £24 a month to a £200,000 mortgage, bringing the cumulative increase since rates first started to rise to £114 a month.
It comes at a time when consumers are already suffering from steep increases in food, petrol and energy costs.
Why is this happening?
Like many central banks around the world, the Bank of England is increasing interest rates in a bid to control inflation, which measures rises to the cost of living.
Inflation as measured by the Consumer Prices Index is currently running at 9%, its highest level for 40 years, and it is expected to hit 11% later this year.
To put this in context, the Bank of England is supposed to keep inflation at around 2%.
High inflation is currently a global problem due to a combination of high energy and fuel prices, which impact the cost of goods, disruption to the supply chain caused by Covid-19 and the conflict in Ukraine.
Who does it affect?
Not everyone will be impacted by the latest increase.
Nearly three-quarters of homeowners have a fixed rate mortgage, and they will not see any change to their monthly repayments until their current deal ends.
But the news is less good for those with a variable rate mortgage.
Around 850,000 people are currently on a tracker mortgage, with a further 1.1 million on a standard variable rate one.
These homeowners will see their monthly repayments increase by around £24 a month if they have a £200,000 mortgage, adding to the previous increases they have already seen since December.
What should I do now?
If you are coming to the end of a fixed rate mortgage, start looking for a new deal now.
Although the interest rate rises seen since December will already have been priced into new deals, further increases are expected in the months ahead.
You can ‘book’ a mortgage offer up to six months in advance of your current deal ending.
With rates only heading in one direction, try to line up a new deal as soon as possible.
You should also look for a new mortgage of you are currently on your lender’s standard variable rate.
The average interest rate charged on standard variable rates is currently 4.91%, meaning you could save £189 a month if you switch to a typical two-year fixed rate product of 3.25%, based on a £200,000 mortgage.
If you are on a tracker deal, which moves up and down in line with changes to the Bank Rate, it may not be possible to remortgage without paying early redemption penalties.
Check with your lender to find out if this is the case. If you can exit your current deal without penalties, you may want to consider remortgaging onto a fixed rate deal to protect yourself from further interest rate rises.
Economists are predicting the Bank Rate could rise to 3% next year.
If you are struggling to pay your mortgage, contact your lender as soon as possible.
There are a number of steps they can take to help you, including giving you a temporary payment holiday or putting you on to an interest-only mortgage for a short time.
But options become more limited if you have already missed a payment.
Key takeaways
- The Bank of England has increased interest rates five times in a row, lifting the official cost of borrowing to a 13-year high
- Yesterday, the Bank Rate increased from 1% to 1.25% , increasing monthly repayments by around £24 a month for someone with a £200,000 mortgage
- If you're on a standard variable rate or tracker mortgage, it's a good idea to fix now, as interest rates are likely to go up again over the coming months
New-build buyers driving the green home movement – and saving up to 52% on energy costs
Climate change and the cost of living are making energy efficiency a priority for new-build buyers, but many people underestimate how much money you can save with a greener home.
New research shows that the cost of living and climate change are creating new priorities for home buyers.
This is particularly the case for new-build buyers, who are prioritising energy efficiency in their buying decision.
And while new-build buyers are driving the green home movement, almost half of buyers of older homes still see energy efficiency as important.
High EPC ratings top of the wishlist for new-build buyers
Energy efficiency is now a high priority for those who bought or intend to buy a new-build home.
More than two-thirds of new-build buyers (69%) said EPC ratings were either extremely or very important to them.
The energy efficiency of new-builds is a growing attraction for buyers. More than 80% of new-builds have an energy efficiency rating of A or B, compared to just 3% of older homes.
“Rising energy costs and greater awareness of climate change are starting to have greater influence on home buying decisions,” said Richard Donnell, Research Director at Zoopla.
“The energy efficiency of new homes and the lower running costs is a recognised attraction for would-be buyers compared to those looking for a home in the resale market.”
You can save up to 52% on your energy bills with a new-build home
We’ve taken a look at the government’s EPC data, and you can save a huge amount by moving to a home with a higher EPC rating.
New-builds offer up to 52% lower running costs over a year compared to a similar-sized older property.
The average carbon output of a new home also comes in at under a third of that from an older home (1.4 tonnes vs 3.8 tonnes per year).
Other research has found similar energy savings for new-build owners.
New-build owners save an average of £629 a year on energy bills, according to the Homes Builders Federation.
But lots of people don’t realise how much you can save by moving to a new-build home.
When asked to estimate how much money a new-build could save you on energy bills over a year, 6 in 10 respondents thought it would be less than 52%.
And a third of people thought you’d only save 20% on energy bills in a new-build compared to a similar older home.
Buyers care about the environmental impact of building a new home
New-build buyers are also conscious of the environmental impact of building a new home.
Three quarters (74%) of new home buyers said it was important that their home is built with minimal impact on the environment.
What’s next in the green home movement?
This is just the start of decarbonising the housing market and reducing emissions from UK homes.
The introduction of new government regulations has seen an increase in the energy efficiency requirements of new homes.
The Future Homes and Buildings Standard ensures that new homes built from 2025 will produce 75-80% less carbon emissions than those delivered under current regulations.
This will mean massive energy savings for homeowners.
While buyers of older homes are less concerned about the energy efficiency of their home at the moment, 2 in 5 (41%) still said it's important to them.
“We expect the importance of energy efficiency to increase further as the Government continues to roll out further policies," said Richard Donnell.
“The new homes market and the private rented sector are the big focus areas for policymakers at present.”
“Rising energy costs will only serve to increase the importance of energy efficiency and running costs of homes as part of home moving decisions.”
Surveyed 2,615 people between 28 February 2022 and 10 March 2022. Respondents had either bought a home in the last 18 months or intend to buy one over the next 18 months.
Key takeaways
- Rising living costs and growing climate change concerns are creating new priorities for home buyers
- Nearly 70% of new-build buyers say energy efficiency is an extremely or very important factor in their home
- New-builds can save you 52% on energy costs over a year – but most people think it’s less
Extra protection and powers for renters announced in Renters Reform Bill
Changes will protect renters from rent rises, ensure homes are fit to live in and make it easier to have a pet.
Renters are set to be protected from unfair rent increases as part of a package of reforms to improve the private rented sector.
New rules being introduced will also end ‘no fault’ evictions, while all rental homes will have to meet minimum standards, the government said.
Other changes include making it illegal for landlords to have blanket bans on families with children or people receiving benefits, and it will also be easier for renters to have pets.
The government claims the measures, which will be included in the Renters Reform Bill to be introduced during the current parliamentary session, are the biggest shake up for the private rented sector for 30 years.
Richard Donnell, Executive Director of Research and Insight at Zoopla, said: “With the backdrop of the cost of living crisis putting pressure on renters, these reforms are welcome and timely, particularly as they’re largely focused on boosting the quality of housing in the rented sector.
“The private rented sector plays an important role in the housing market, providing much needed homes for a wide spectrum of households. These reforms mark another milestone in the journey to create a suitable equilibrium between renters and private landlords who provide the majority of homes for rent.”
What will change?
Under the new rules, arbitrary rent review clauses will be outlawed, and notice periods for rent increases will be doubled. Renters will also have stronger powers to challenge rent rises if they think they are unjustified.
To ensure all private rented properties are fit for occupation, the Decent Homes Standard will be extended to cover the sector for the first time.
If homes fall below this standard, people will have their rent repaid. Councils will also have stronger powers to tackle rogue landlords, including larger fines for serious offences.
Going forward, all renters will be moved into a single system of ‘periodic tenancies’, enabling them to leave poor quality housing without remaining liable for the rent, and making it easier for people to move if their circumstances change.
Section 21 ‘no fault’ evictions will also be banned, meaning tenancies will only end if a renter wants them to, or the landlord has a valid reason, defined in law, to do so.
Meanwhile, all renters will have the right to ask to have a pet in their home, and their landlord must consider their request and cannot unreasonably refuse it.
A new Private Renters’ Ombudsman will also be created to settle disputes between renters and landlords quickly and at a low cost, while renters will be able to demand information on their landlord and rate them.
Why is this happening?
The government claims the measures will help to redress the balance between landlords and the 4.4 million people who rent homes in the private sector.
While the majority of renters have safe homes, the government wants to help the 21% of people who rent in the private sector have properties that are deemed to be unfit, more than half of which pose a risk to renters’ health and safety.
It also wants to protect renters from ‘no fault’ evictions, after research showed more than a fifth of private renters who moved in 2019 and 2020 did not do so by choice.
Who does it affect?
The move is great news if you rent in the private sector, as it offers you greater certainty over how long you can live in your home and how much it will cost you.
You also have the reassurance that your home will meet minimum standards and that you have an easy route to take action if disputes occur between you and your landlord.
But there are concerns that the measures could lead to more landlords exiting the sector.
A growing number of amateur, private landlords have sold their properties in recent years as a result of tax hikes and increased regulation, which have made the market less profitable.
This trend has led to a growing mismatch between supply and demand, forcing rents higher.
Donnell said: “There is a delicate balance to ensure reforms don’t compound these supply-side challenges, which continue to keep an upward pressure on rents.
"Rents have risen 11% in the last year. Ensuring decent homes is paramount but so is the investment into this important sector of the housing market.”
Key takeaways
- Renters are set to be protected from unfair rent increases as part of a package of reforms to improve the private rented sector
- ‘No fault’ evictions will be banned, and homes will have to meet minimum standards
- It will be illegal for landlords to refuse families with children or people receiving benefits, while it will also be easier for renters to have pets