The Bank of England (BOE) is reviewing its mortgage market recommendations to take account of record-low interest rates, which should make it easier for a homeowner to repay.
The central bank said it was reassessing affordability criteria that set a cap on the size of a loan as a share of a borrower’s income in the light of record-low interest rates.
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The launch of the review comes amid intense political scrutiny of the low-deposit mortgage market after Boris Johnson pledged to help more first-time buyers get on the property ladder in his speech to the Conservative party conference in the autumn.
Promising to turn “generation rent into generation buy”, the prime minister has asked ministers to explore plans to allow more mortgages to be offered with a deposit of only 5%, helping would-be homeowners who have been asked for bigger deposits since the pandemic struck.
Re-evaluating rules in place since 2014
The Bank said its review would examine structural changes to the mortgage market that had taken place since the rules were first put in place in 2014, when the former chancellor George Osborne first gave tougher powers to the Bank to intervene in the property market.
Aimed at preventing the property market from overheating, the rules impose limits on the amount of riskier mortgages banks can sell and force banks to ask borrowers whether they could still pay their mortgage if interest rates rose by three percentage points.
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By GlobalDataHowever, Threadneedle Street said such a jump in interest rates had become more unlikely, since its base rate had been slashed to only 0.1% and was expected by City investors to stay lower for longer than had previously been the case.
Household debt more sustainable now than in 2014
Outlining the review in its regular financial stability report, the Bank said: “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 incomes and unemployment for mortgage affordability.
Despite undertaking the review, the Bank said it did not believe the rules had constrained the availability of high loan-to-value mortgages this year, instead pointing the finger at high street banks for pulling back from the market.
