Interest rates: Expert discusses Bank of England decision making
We use your sign-up to provide content in ways you’ve consented to and to improve our understanding of you. This may include adverts from us and 3rd parties based on our understanding. You can unsubscribe at any time. More info
The rules, introduced in 2014 in the wake of the financial crisis, are being re-evaluated as part of a review of market restrictions that concludes next week. Officials are reportedly considering softening affordability checks for borrowers.
One way of doing this, currently being considered, is to reduce the additional interest rate charge which is used to test borrowers’ ability to pay the reversion rate after an initial deal – which specifies a fixed rate of interest – ends.
Under the rules, lenders have to check that homebuyers can afford repayments once any initial interest rate deal ends by testing their ability to pay a higher rate, which is currently three percent higher than the bank’s standard variable rate.
The checks are designed to make sure borrowers aren’t too vulnerable to potentially higher interest rates in the future.
However, interest rates have stayed at rock bottom levels for far longer than officials anticipated when they brought in the rules, meaning that a three percent rise in the base rate now seems unlikely.
While the rules would benefit first-time buyers, economists have warned that the changes risk creating a housing bubble, by propelling property prices to “unsustainable levels”.
A housing bubble is when the price of property demonstrates a strong and persistent deviation from fundamental data, like income, economic growth and population migration.
It is characterised by temporary periods of high demand, low supply and inflated prices, which creates instability in the housing market – and the economy as a whole.
This comes as house prices soared by 12 percent in the 12 months leading up to September after being boosted by the stamp duty cut, a faster pace than the run-up to the financial crisis.
Nationwide warned last week that house sales in 2021 are also close to levels last seen in 2007, just before the property market crash.
November saw property prices rise by a further 0.9 percent, making the average home now worth 15 percent more than before the pandemic.
Andrew Wishart, a housing economist at Capital Economics, said the changes could cause the housing market to “enter bubble territory”.
Speaking to the Telegraph, he said: “Loosening the affordability test increases the chances that you continue to get large increases in house prices, which would start to make us worry about the housing market entering bubble territory.
Boris warned northern voters ‘will learn’ from broken promises [ANALYSIS]
One million pensioners in ‘life or death’ crisis [REVEAL]
William admits he head-bangs to AC/DC to get up for royal engagements [INSIGHT]
“It would help perpetuate very strong demand that might take prices to an unsustainable level.”
He warned that prices could suffer a “correction” and slump if growth continues at its current pace.
He said: “This is exactly the time when we probably want that affordability test to make a difference and slow down the most stretched lending a little bit, and cool things off a little.”
But David Hollingworth, at brokerage L&C Mortgages, said the current rules are particularly difficult for first-time buyers who typically have to accumulate a large deposit and then stretch to get a large mortgage to get onto the housing ladder.
Meanwhile, Martin Beck at the EY Item Club described the potential rule changes as being “odd given how loose mortgage lending has been”, adding: “It has not been hard to get a loan.”
But he said that changing the rules after the stamp duty holiday has ended means officials are “not adding fuel to the fire; they are supporting the market at a time when headwinds are building”.
According to the Telegraph, officials are also reviewing the rule which limits lending to buyers borrowing more than 4.5-times their income.
Express.co.uk approach the Bank of England for comment.
Source: Read Full Article