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Bank of England reveals plan to relax mortgage affordability rules

The suggested affordability changes should make it easier for first-time buyers to get mortgages in 2022.

The Bank of England has announced plans to relax mortgage lending rules.

At the moment, borrowers have to show they’d be able to afford the repayments if their mortgage reverted to their lender's higher variable rate and interest rates jumped 3% .

This test is designed to check buyers could still meet mortgage payments if rates went up.

But the Bank’s Financial Policy Committee (FPC) has decided this affordability rule is no longer needed.

It will consult mortgage lenders and other industry parties early next year about withdrawing the 3% interest rate rule.

The change is likely to offer better mortgage opportunities to first-time buyers.

Why are mortgage affordability rules being eased now?

A number of new affordability guidelines were introduced in 2014.

This idea was to protect the banking system from high levels of household debt following the financial crisis of 2008.

At that time, the FPC recommended that lenders limit the number of mortgages they offered to people borrowing 4.5 times their income.

It also asked lenders to make sure borrowers could afford their mortgage repayments when their fixed-rate deal ended.

This calculation was based on interest rates increasing by 3%, and borrowers being moved on to their lender’s “reversion rate” or higher standard variable rate, which is typically 4.5% or higher.

The reforms were introduced when interest rates were expected to rise to 2.25% in the coming five years.

Today, the Bank of England base rate currently stands at 0.25%.

While interest rates are expected to rise next year, they are likely to do so at a much slower rate than previously expected.

Meanwhile, the FPC has decided other limits on how much banks can lend to people are enough to protect financial stability.

This includes limiting the number of mortgages given to people borrowing a high multiple of their income to just 15%.

Who does the change in mortgage affordability rules affect?

The end of the higher standard variable plus 3% interest rate affordability rule is great news for first-time buyers.

The fact that people buying their first home typically have lower salaries and smaller deposits meant they were more impacted.

For example, a borrower applying for a two-year fixed rate mortgage with interest charged at 1.99%, would have to show they could still afford repayments if the interest rate was 7.5%.

While monthly repayments on a £160,000 mortgage at 1.99% are £682, they would nearly double to £1,196 if the rate was 7.5%.

The rule led to thousands of borrowers being told they could not afford a mortgage, even though they were never likely to face repayments at such high interest rates.

The changes are likely to mean more first-time buyers make it onto the ladder in 2022.

But, the announcement was not all good news for first-time buyers.

The FPC has decided to keep limits in place on the number of high loan-to-income mortgages lenders can provide to borrowers.

Mortgages are getting cheaper for first-time buyers

More good news for first-time buyers is that the average cost of a mortgage for people with only a 5% deposit has fallen to a record low.

The typical cost of a two-year fixed rate mortgage for someone borrowing 95% of their home’s value fell for the eighth month in a row in November to 3.09%.

Meanwhile, the cost of a five-year fixed rate deal dropped to 3.39%.

Both rates are the lowest financial information group Moneyfacts has recorded since records began in 2011.

The number of different mortgages available to all borrowers has reached the highest level since 2008.

Homeowners now have more than 5,300 different deals to choose from.

This includes more than 700 mortgages for borrowers with deposits of 10% or less.

First-time buyers struggled to get a mortgage in 2021

This year saw plenty of first-time buyers have their mortgage applications rejected by banks or building societies.

Only 35% of first-time buyers had their first mortgage application approved in 2021.

This is compared with 48% who were approved first-time in March 2020, according to research by specialist lender Aldermore.

The reasons buyers were turned down for a mortgage included:

a poor credit history
administrative errors
not having a large enough deposit.
having taken out a payday loan
being self-employed
having an irregular income
a high level of debt.

Buyers surveyed blamed the situation on the Covid-19 pandemic.

Half of those surveyed had experienced disruption to their employment, such as being furloughed or made redundant.

While 2022 looks set to offer more mortgage opportunities, buyers will still need a good credit score.

What else is happening in the mortgage market?

Mortgage lending looks set to reach a record high in 2021.

This is on the back of high levels of housing market activity caused by the pandemic-induced search for space and stamp duty holiday.

Lenders are expected to have advanced a total of £316bn-worth of mortgages during the year.

That’s 31% more than in 2020, according to mortgage industry body UK Finance.

The prediction is in line with our own data that estimates one in every 16 properties will change hands this year.

We’ve seen the busiest property market for 14 years, and the increase in activity has not just been seen among homeowners.

Lending to buy-to-let landlords soared by 83% year-on-year to £18 bn, the UK Finance figures showed.

The private rental sector currently faces a significant mismatch between supply and demand.

A shortage of homes to rent has been putting upward pressure on the cost of renting.

The cost of renting a home in the UK outside of London is now £809 a month on average.

But the increase in buy-to-let lending revealed by UK Finance suggests landlords have been buying more homes this year.

An increase in supply will potentially mean less competition for rentals, which could moderate rental costs.

by Blackstones

Interest rates go up for the first time in 3 years

Nearly 2m homeowners will face mortgage repayment increases of around £10 to £15 a month as the Bank Rate rises to 0.25%

The Bank of England has increased interest rates for the first time in more than three years.

The Bank Rate, otherwise known as the official cost of borrowing, has gone up from a record low of 0.1% to 0.25%.

The move by the Monetary Policy Committee (MPC) means nearly 2m homeowners will see their monthly mortgage repayments go up.

The change will add around £14 a month to repayments on a £200,000 mortgage.

But the majority of mortgage-holders will not be affected by the hike as they have fixed-rate loans.

Why are interest rates going up?

Inflation has reached a 10-year high, which is why interest rates are going up.

The MPC can move interest rates up or down to help manage inflation.

Inflation is the rate at which the things we buy are getting more expensive. It is measured by the Consumer Prices Index.

Inflation reached 5.1% in November, more than double the Bank of England’s 2% target.

Raising interest rates helps to cool inflation by making it more expensive to borrow money.

Higher interest rates discourage individuals and businesses from spending, which causes the economy to slow and price rises (inflation) to ease.

Will my mortgage payments go up?

Some mortgages move up and down in line with changes to the Bank Rate.

These mortgages might be tracker deals or the standard variable rates that borrowers revert to once a fixed-rate deal ends.

As a result, any borrowers on one of these home loans are likely to see the cost of their monthly repayments go up. But the increases will not be large.

Mortgage trade body UK Finance estimates the 850,000 people with a tracker mortgage will see their monthly repayments rise by an average of £15.45.

Meanwhile, the 1.1m borrowers on a standard variable rate will face an increase of £9.58 per month.

But the majority of mortgage-holders will not see any change. This is because 74% of mortgage-holders are on fixed rate deals.

Under a fixed-rate deal the interest rate you pay stays the same for the length of the product - typically two or five years.

What’s the wider impact of interest rate rises?

There was some but not a lot of surprise that the Bank Rate went up to 0.25%.

Despite the economic uncertainty created by the omicron variant, the MPC had been expected to raise the official cost of borrowing from its record low level.

As a result, many mortgage lenders had already priced in a possible increase into the interest rates they were offering on new deals.

This, combined with the fact that the Bank Rate only increased by 0.15%, means the cost of new mortgage deals is unlikely to shoot up in the near future.

That said, economists are expecting further rate hikes in 2022, with some predicting the official cost of borrowing could end the year as high as 1%.

Mortgage rates are expected to trend up during the coming 12 months. But strong competition in the market means rates are likely to remain relatively low.

If you’re currently thinking of remortgaging, it makes sense to do so sooner rather than later.

The interest rate increase is expected to have only a very limited impact on the housing market more broadly.

The cost of borrowing is only one of the factors that affects house price growth, and interest rates are still very low by historical standards.

Strong demand from buyers, high levels of employment and a shortage of homes for sale is likely to continue to put upward pressure on property prices.

by Blackstones

Revealed: how much parents give their children to help them buy a home

We lift the lid on how hundreds of thousands of grown-up children are set to be handed money to put towards a deposit as a Christmas present this year.

A staggering 64% of parents whose grown-up children own a home have given them money to help them onto the property ladder.

And a further 10% of parents said that while they did not contribute to their children’s house deposit themselves, other relatives did.

Our research shows that parents forked out an average £32,440 to put towards their children's house deposit.

Some parents went even further, with 14% giving their children more than £50,000.

Meanwhile, 11% of parents paid the entire deposit for a new home. And 4% went one step further still and bought a home for their offspring mortgage-free.

Our research was carried out among Zoopla users, nearly 1,100 of whom are parents to grown-up children.

Giving the kids a deposit for Christmas?

Hundreds of thousands of people are set to get some festive cheer this Christmas in the shape of help with a deposit for a new home.

Yes, that's right, 3% of parents with adult children plan to give them money this Christmas to help them onto the property ladder.

But it is not just deposits that parents are dishing out as presents for special occasions.

Nearly one in 10 parents whose grown-up children own a home have given them money for their mortgage as a Christmas or birthday present.

Some 11% of parents have given their children rent as a present.

Here’s what else parents have given their children as a Christmas or birthday present:

money for bills: 15% of parents
money for repairs: 13% of parents
money for decorating: 12% of parents.

Why do parents help their children to buy a home?

Up to 25% of parents helped their children with a deposit for a new home simply because they could afford to do so.

Meanwhile, 24% of parents said their children would never have been able to afford to get onto the property ladder without their help.

Nearly 20% contributed out of guilt or sympathy, believing it to be much harder for their children to buy a new home than it was for them.

What else are parents paying out for?

The so-called 'Bank of Mum and Dad' doesn’t always stop at the deposit.

Up to 17% of parents currently help their adult children with rent or mortgage payments, with 8% doing so every month.

In fact, 36% of parents have helped with their children's rent or mortgage payments at some stage.

What’s more, 11% give their children a regular allowance for home-related expenses, while 28% offer them ad-hoc financial support.

What could our research mean for you?

Our research shows just how few young homeowners have been able to get the keys to their own home independently.

Around three-quarters of buyers had a helping hand financially from family.

Those who managed to ‘go it alone’ and buy a home without parental support are very much in the minority.

Daniel Copley, our consumer expert, explained:

“When looking at the data, it is very clear that average house prices in the UK have increased at a greater rate than salaries over recent decades, reinforcing the notion that it is harder for young adults to get on the property ladder today than it was for previous generations.

“Despite the financial hurdle that a first home purchase can present, our data demonstrates that first-time buyers are prolific in the market and have been for some time.

“Putting more money towards the purchase of a home can help reduce mortgage payments and in turn can unlock lower interest rates, so it’s clear that, when it comes to property, the ‘Bank of Mum and Dad’ will be in business for a long time to come.”

What if the Bank of Mum and Dad can't help out?

The government has a number of initiatives designed to help first-time buyers get onto the property ladder. They include:

Help to Buy: Equity Loan: offers aspiring homeowners the chance to buy a new-build home with just a 5% deposit
Shared Ownership: allows buyers to purchase a share of a property and pay rent on the remaining share
First Homes: helps local first-time buyers and key workers by offering new-build homes at a 30% - 50% discount
Lifetime ISA: allows first-time buyers to save up to £4,000 a year, with the government adding a 25% bonus
95% mortgage guarantee scheme: the government ‘guarantees’ mortgages for buyers with 5% deposits.

Key takeaways

Nearly two-thirds of parents have helped their children with a deposit for a new home, forking out an average of £32,440
Some 24% of parents say their children would never have been able to afford to buy a home on their own
The so-called 'Bank of Mum and Dad' doesn’t stop at deposits, with 36% of parents helping with rent or mortgage payments, too

by Blackstones

One in every 16 homes to change hands in 2021

Pent up demand triggered by the pandemic leads to the busiest market for more than a decade as one in every 16 homes is set to be sold to new owners.

One in every 16 privately-owned properties is set to change owners in 2021, making it the busiest year for the housing market since 2007.

The ongoing re-evaluation of homes triggered by the Covid-19 pandemic has continued to drive increased demand throughout the past year.

The high number of buyers in the market, combined with a shortage of properties for sale, has pushed up the average cost of a UK home to £240,000, compared with £200,000 five years ago.

During the past year alone, the typical property has seen £15,500 added to its value, driven in part by buyer appetite for bigger homes, especially in commuter zones and rural areas.

What’s happening to house prices?

House prices rose at an annual rate of 6.9% in October, double the rate of 3.5% recorded in the same month of 2020.

But the figure represents a slight easing in growth compared with the previous two months, and this trend is expected to continue into next year.

Quarterly figures also suggest the rate of price rises is slowing, with property values increasing by 1.2% in the three months to October, compared with 2.8% in the three months to the end of July.

Wales continued to see the strongest gains, with house prices rising 10.8% year-on-year, followed by the North West at 9%.

At the other end of the scale, London saw the slowest growth of just 2.3%.

On a city level, Liverpool, Manchester and Sheffield, where property remains relatively affordable, posted the highest increases of 10.6%, 8.7% and 7.9% respectively.

Here's how prices have grown in cities over the last quarter

How busy is the housing market?

The property market continues to be busy with buyer demand running 28% above the five-year average.

Unfortunately, this strong demand has not been met by an increase in homes being put up for sale, with the number of properties on the market down 42% compared with the five-year average.

Although there is a shortage of both houses and flats, the number of houses listed for sale is more than 55% down on the five-year average, while flats are down by a more moderate 15%.

This difference in availability is reflected in price growth, with the average cost of all types of houses jumping by 8.3% during the past year, while the typical cost of a flat has risen by a more moderate 1.6%.

What could this mean for you?

First-time buyers

Intense competition in the market, combined with rising prices, is bad news for first-time buyers.

That said, you can put yourself in a much better position if you're prepared to purchase a flat, rather than a house.

Not only is the shortage of flats for sale less acute than that of houses, but flats have also seen lower price gains in the past year, making them more affordable.

Flats without outdoor space are also taking longer to sell than houses and flats with access to gardens, making this sector of the market less frenzied.

Home-movers

If you have a home you want to sell, particularly if it's a family home or larger house, you're in poll position to obtain both a quick sale and your asking price, as demand for these types of properties remains high.

That said, in the current fast-moving market, co-ordinating your sale with your next purchase could be tricky.

If you do want to sell, you should contact estate agents now to ensure your home is ready to list in January, in time for the New Year rush.

Take the opportunity to get a feel for how fast-paced the market is in your area and how much choice you'll have for your next home. But bear in mind that the market should see a spike in new listings in the New Year.

What will happen in the housing market?

Buyer demand is expected to remain strong going into 2022, but new supply is also likely to come on to the market, as households use the holiday period to make a decision about moving.

The proportion of buyers who are also sellers is expected to increase, helping to ease the shortage of supply.

Grainne Gilmore, head of research at Zoopla, said: “In typical years, the highly seasonal supply of homes being listed for sale slows in the run up to Christmas, but rises sharply in the new year.

“On average, the supply of listings at the end of January runs some 50% higher than the start of December.

“Other factors that will affect prices next year include the looming economic headwinds in the shape of rising inflation – which will push household costs higher.

“Even with some interest-rate rises, mortgage rates are likely to remain relatively low compared to long-run averages, and there is more room for price growth across some of the most affordable housing markets.”

Overall, house prices are expected to rise by 3% in 2022, while around 1.2 million homes are likely to change hands, down from an estimated 1.5 million this year.

by Blackstones

UK lender offers 40-year fixed-rate mortgage

The long-term mortgage deal means borrowers will pay the same rate for up to four decades. What are the key advantages and disadvantages?
Buyers now have the option to keep the interest they pay on their mortgage the same for up to 40 years.

Specialist lender Kensington Mortgages has launched a 40-year fixed-rate mortgage.

The deal offers borrowers the chance to pay the same interest rate on their home loan for between 11 and 40 years.

Their interest rate will not change even if the Bank of England increases the official cost of borrowing.

Interest rates are currently at record lows, and buyers who fear the impact of rate rises could benefit from fixing their mortgage now.

The maximum term of a fixed-rate mortgage is usually 10 years.

It is rare in the UK for fixed rate deals to cover the entire “term” of a mortgage, which is usually 25 to 35 years.

“A fixed-rate that covers the entire mortgage term is already very popular in some parts of continental Europe,” said Mark Arnold, CEO of Kensington Mortgages.

“It is likely to become increasingly attractive in a rate-rising environment.”
Why are 40-year fixed mortgages on offer now?

Interest rates are currently at a record low of 0.1%. But the Bank of England is expected to start increasing them in the near future.

If you have a fixed-rate mortgage your repayments stay the same for the product term. The deals typically have terms of two or five years.

Opting for a longer term enables homeowners to benefit from record low rates for longer.

Even so, a term of up to 40 years is highly unusual.

Online broker and lender Habito currently also offers a 40-year fixed rate deal.

A handful of lenders also offer 10-year fixed rate mortgages.
Can I get a 40-year fixed rate mortgage?

One key advantage of the 40-year mortgage is that it judges affordability based on the interest rate the borrower will actually pay.

By contrast, many lenders base affordability on a hypothetical rate if interest rates rise.

As a result, people may be able to borrow more with the Kensington Mortgages product.
What are the disadvantages of a 40-year mortgage?

Borrowers should think carefully before opting for a long-term fixed rate deal.

If you move home during the mortgage term, it should be possible to move the mortgage with you. This is known as “porting”.

But, if you want to pay your mortgage off early, you could face hefty fees.

For example, if you want to leave the mortgage in the first 15 years, you will need to pay a fee worth 7% of the outstanding balance.

The exit penalty gradually falls to 2% of the outstanding debt by year 36.

That said, there are no early redemption penalties if you are selling the property.

Crucially, these fees are also not charged if you are impacted by a critical illness or if the mortgage holder dies.
What else do I need to know about 40-year fixed mortgages?

The Kensingont Mortgage 40-year deal is available to borrowers with deposits of between 40% and 5%.

Interest rates for people fixing for between 36 and 40 years start at 3.34%.

The lowest rate is available to someone with a 40% deposit. This means they are borrowing 60% of their home’s value, and paying a £1,499 arrangement fee.

People with only a 5% deposit will pay a higher rate of 4.16%, if they pay the same arrangement fee.

Lower interest rates are available for people fixing for a shorter period of time.

Rates start at just 2.83% for those fixing for between 11 and 15 years.