More affordable mortgages may boost 2021 housing market

The Bank of England is to review the affordability tests imposed on  borrowers, opening the door to a possible relaxation of rules.

Back in 2014 the Bank introduced a series of stress tests - a product of the credit crunch - to try to avoid borrowers finding themselves unable to service their debt in the event of a significant interest rate rise.

The notional rise was three full percentage points - a figure that is now considered questionable in the era of extremely low Bank of England base rate.

The BoE’s Financial Policy Committee says it is to review how the stress tests are calibrated;  it will take into account that the so-called reversion rate, levied by mortgage lenders after introductory periods, is n ow much lower than in 2014. 

The FPC says: “Consistent with these factors, the option-implied distribution of future interest rates suggests a lower probability of a 300 basis points rise than in 2014 … This suggests that households’ capacity to service debt is more likely to be supported by a prolonged period of lower interest rates than it was in 2014.” 

The review will also examine changes in household income and unemployment for mortgage affordability.

In October Prime Minister Boris Johnson called for far more affordable mortgages to help first time buyers get on to the property ladder “even if they only have a very small amount to pay by way of deposit.” 

He also recommended a relaxation of stress tests and called for more 95 per cent loans, describing low-deposit mortgages as “absolutely revolutionary.” 

Johnson also hinted that work was underway between the government and lenders on a new breed of long-term fixed-rate mortgages with deposits of no more than five per cent.