Major shake-up of mortgage rules could let homebuyers get bigger mortgages

HOMEBUYERS could be able to get bigger mortgages under a major rules shake-up.

Currently there are two key rules in place, which aim to stop banks granting bigger mortgages than buyers can actually afford.

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Banks will typically lend you up to 4.5 times your income if you’ve applied for a mortgage to buy a home.

But this is subject to affordability checks, which determine what level of monthly repayment you can actually afford.

The first big rule banks have to follow is that they are limited on number of mortgages they can approve where customers have applied to borrow more than 4.5 times their salary.

The second big rule is that buyers must meet a “stress test” to check their finances.

When you apply for a fixed rate mortgage, you’ll lock in your interest rate for a set period of time.

Once this time is up, you’ll be switched over to something called a “reversion rate” – which is usually higher than you were paying before.

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Under the stress test, you need to prove you can pay a rate that is 3 percentage points higher than the reversion rate.

This rule has meant that many people have not been able to take on as big a mortgage as they might have been able to afford.

But now the Bank of England is considering scrapping this stress test – which could mean that you can take out a much bigger mortgage.

It has launched a consultation into whether to axe the rule, which will close on May 6.

AFFORDABILITY CONCERNS

But experts have raised concerns about Brits being able to take on bigger mortgages at a time when budgets are already squeezed due to a cost of living crisis.

Hargreaves Lansdown senior personal finance analyst Sarah Coles said letting people borrow more money during the crunch could be a “risky move”.

She said: “The worry is that this could mean more people are able to borrow more money, which could make them vulnerable to over-stretching themselves to afford sky-high prices.”

It’s a problem if you were to lose your job, interest rates shoot up drastically or you have a change in circumstances which means you can’t afford your mortgage repayments.

Another potential issue is if there were to be a house price crash, which could leave some homeowners in negative equity.

Interactive Investor senior personal finance analyst Myron Jobson said people should be cautious of “biting off more than they chew financially” to bag a home.

He said: “This could be a particular issue among first-time buyers – many of whom have seen their desperate efforts to buy thwarted by runaway house prices and the cost-of-living squeeze on deposit building.”

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This post first appeared on thesun.co.uk