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BOE Move to Scraps Mortgage Tests Puts First Time Buyers at Risk

© Reuters.

(Bloomberg) —

The Bank of England has been accused of putting first-time homebuyers at risk by relaxing its mortgage lending rules just as rising interest rates threaten to crash the property market.

The central bank’s Financial Policy Committee said Monday it will scrap affordability tests from Aug. 1, making it easier for purchasers to borrow.

Charles Goodhart, a former rate setter at the BOE, said it’s “an extraordinary moment to relax affordability constraints” and that it looked like the BOE had come “under political pressure” to support government plans to increase home ownership.

In December, the FPC launched a review of its affordability rules, under which mortgage borrowers must prove they can repay loans at rates 3 percentage points above the lender’s reversion rate. The checks were introduced in 2014 as part of measures to guard against a dangerous build-up of household debt. 

The review started at a time when house price inflation was in double digits amid concerns that the rules were blocking first time buyers. On Monday, the FPC said its decision was tested against “a scenario of rapidly rising house prices.” No analysis was done on how the changes would work in a period of falling prices.

Capital Economics is forecasting a 3% drop next year, and Jon Cunliffe, a BOE deputy governor who sits on the FPC, told ITV (LON:ITV) News earlier this month that he could “see evidence of a slowdown” and that the “market is starting to turn.”

In May, Goodhart told the Treasury committee of MPs that easing affordability checks would cause “a lot of really significant despair” particularly among first time buyers who “have to take out very large loans and then find that the value of their house starts going down.”

In the worst case scenario, new buyers would be unable to remortgage if prices fell, leaving them able to access only the most expensive loans and trapped in debt. In 2019, the Financial Conduct Authority estimated that there were 250,000 so-called “mortgage prisoners” stuck on high rates in the UK.

What Bloomberg Economics Says … 

“It does seem ironic that the BOE is scrapping affordability checks just as interest rates are rising. In theory this will allow potentially more financially vulnerable first time buyers to buy a home just when the housing market may be turning.”

–Niraj Shah, European economist at Bloomberg Economics.

Prime minister Boris Johnson has made increasing home ownership a key plank of efforts to reboot his premiership after the partygate scandal. He extended right to buy to housing associations earlier this month.

“I can’t help wondering if they (the FPC) were under political pressure,” Goodhart said in an interview. “It just seems very odd. If one was being counter-cyclical now would be the time to tighten affordability.”

The BOE stressed that it was keeping a separate loan-to-income limit in place to restrain mortgage borrowing and that the Financial Conduct Authority’s Mortgage Conduct of Business rules “ought to deliver the appropriate level of resilience to the UK financial system in a simpler, more predictable and more proportionate way.”

The review was unveiled before the government’s latest right to buy plans but its ambitions on home ownership have been clear since the 2019 election manifesto.

©2022 Bloomberg L.P.

BOE Move to Scraps Mortgage Tests Puts First Time Buyers at Risk

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