Amid concerns of another property bubble forming following the soaring house prices in the last year the Bank of England has today announced they will impose a limit on lending.
This is the first time such a limit has been put in place since 1980 and it is claimed this has been done since The Bank of England does not believe we are yet in a property bubble but would like to prevent one occurring.
This will affect new mortgage applications in which applicants will be subject to tougher affordability tests and stricter limits on the amount that will be loaned in comparison to income.
In the Step by Step Guide to Buying section of this site we state that banks will usually lend up to 4 or 5 times an applicant’s income however with these changes they will only be allowed to lend above 4.5 times an applicant’s salary to a small percentage of the total people they lend to (no more than 15%). If you’re looking to get a mortgage it is therefore best to plan as if you won’t be able to get one that is more than 4.5 times your salary. This will have the largest effect on those looking to buy in London since although only 9% of mortgages are lent at or above the 4.5 limit nationally, in London 19% of mortgages currently are.
The regulations around affordability checks are that lenders must now ensure the applicant would be able to afford repayments if their interest rate were to increase by 3%. It is therefore worth doing this check yourself before approaching lenders. The BBC website has a great tool for this here
These restrictions are however not a huge departure from how mortgage applications were processed prior to this, banks will probably just be more strict in enforcing them now.
The Bank of England has put these restrictions in place based on a prediction that house prices will still rise another 20% in the next 3 years therefore they clearly don’t think we’re at the peak of the market yet.
With this in mind, as per our last post, if you can still get a mortgage it’s probably a good time to start looking for somewhere to buy again.
If you have a deposit but the new restrictions on mortgages have left you unable to buy let us know and we’ll give you free advice on the options still available to you.