It is impossible to please everyone
The Bank of England can rarely win in anything it does, according to Nick Morrey (pictured), technical director at Coreco.
He explained that if it needs to cool off the housing market and put rates up people do not like it, and, if it drops rates to stimulate the economy, savers do not like it.
“If they take measures to make the ‘system’ more robust by increasing capitalisation rules for lenders, they do not like it,” Morrey added.
The Bank of England has suggested dropping the affordability test for mortgage lenders, with borrowers currently subjected to two test recommendations that limit how much they are able to borrow. The consultation by the Financial Policy Committee over whether to withdraw the mortgage affordability test will close on May 06.
“The powers that be are ‘consulting’ with stakeholders as they re-assess what many have complained about for years - mortgage lending limits,” said Morrey.
“The two areas being considered are income multiples and stress test affordability calculations, but should we get what we want? And what do we want exactly?”
Read more: Brokers demand affordability-driven approach from lenders
Out-dated systems
Morrey went on to detail why he believes the current systems are anachronistic. He pointed to first-time buyers whose monthly rent is more than their proposed mortgage payments and yet their borrowing power is limited often by income multiples rather than affordability.
“This seems unfair and is definitely holding many first-time buyers back, which affects the whole property market to a degree,” he added.
In part due to the government propping up housing during the height of the pandemic in the form of relief schemes and the stamp duty holiday, house prices have spiked, making them less affordable for first-time buyers. The average price paid for a home in England and Wales in March 2022 was £370,052, up £28,650, or 8.4%, compared to average house prices in March last year, according to e.surv. This is the fifth time in the last 12 months that the average house price has hit a new record high for England and Wales.
Read more: House prices in England and Wales – how much have they grown?
Should either or both limits be loosened too much there could well be a spike in the amount people could borrow that could result in prices rising even faster than they currently are. Morrey believes that affordability changes could be phased in, but outlined that this would be a surprise in itself.
“So what will they do? Chances are they will look to alter one of the two limits but not both,” Morrey said.
According to Morrey, if the government chooses to increase maximum income multiples, then first-time buyers will be given a better chance to get themselves on to the property ladder.
“If applicants can afford a mortgage payment, why should they then be limited? Leaving the affordability stress tests as they are may seem a wasted opportunity,” he added.
However, Morrey went on to say that with predictions of a base rate topping out at over 2%, or possibly even higher, and inflation potentially hitting double figures, he believes the government could justify leaving affordability stress tests well alone for now.
“With actual lending rates edging closer to the stress test rates those limits look less like fantasy with every week that passes,” he concluded.
