Mortgage affordability

Anyone wishing to buy a house with the aid of a mortgage must apply to a lender for a mortgage and one of the first things that they must do is produce evidence of their income and outgoings to prove to the lender that they can afford the mortgage.

Following the financial crash in 2008, the Bank of England introduced the mortgage affordability test. When lenders were considering an application for a mortgage, they were obliged to work out what the borrower's payments would be at a higher interest rate than the one on offer. The purpose of this was to assess prospective borrowers' ability to repay a mortgage if market conditions got more difficult.

The mortgage affordability test was introduced to try to guard against a drop in mortgage underwriting standards and a material increase in household indebtedness that could in turn worsen an economic downturn.

In the face of the very market conditions that the Bank of England anticipated in 2014, namely increasing inflation, a slowing economy and interest rates increasing, it is therefore somewhat surprising that the Bank of England has announced that the mortgage affordability test will be withdrawn from 1 August 2022. This means that the lenders will not have to apply the higher interest rate example.

It is hoped that lenders will continue to adopt responsible lending practices as the fallout from increasing energy prices and cost of living continues to bite. Anyone considering moving house should take advice from a reputable mortgage broker and instruct a conveyancer solicitor as possible in the transaction. It is not the job of the solicitor to comment or advise on the suitability of a mortgage offer because they are not able to give financial advice. However, the solicitor will advise their buyer client on the consequences of failing to keep up their mortgage repayments which could ultimately result in repossession and the buyer losing their home.

Buying a house is the biggest investment that most people will make, and the removal of the mortgage affordability test might make it a bit easier. However, the consequence of getting into difficulties with mortgage payments must never be ignored and buyers should ensure that they do not overstretch their finances.

To discuss this or any other property matter, contact us.

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