Bank of England plans to remove interest rate rule for mortgages
Eliminating the interest rate for mortgages would be a welcome measure.
The Bank of England has announced plans to ease mortgages 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.
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.
Speaking as the Bank issued its regular financial stability report, Bailey said the UK financial system was well equipped to deal with a potential fresh economic downturn caused by the emergence of the coronavirus Omicron variant.
“At the moment, I don’t think we are in a situation where there is sort of stress around the corner in terms of markets,” he said, pointing out that global financial markets had moved as a result of the Omicron variant but had not come close to similar stress levels as seen in early 2020 when the pandemic first spread.
“I don’t think it’s going to be a big stress event,” he said.
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