What’s happened

This week it was announced that the Bank of England’s Financial Policy Committee have withdrawn the affordability test for mortgage applications.

From what I have read it seems that this was introduced as a measure to check that borrowers could still afford their mortgage repayments in the instance of increased interest rates.

This was introduced alongside the Loan-To-Income measures that you are likely aware of, where you can borrow roughly 4.5 times your earnings in the form of a mortgage. This measure remains.

What it means

Theoretically it means that more people are likely able to get a mortgage in order to buy a property, even if they may struggle making repayments.

Unfortunately, people taking on mortgages that they couldn’t afford was the fire that kickstarted the 2008 financial crisis.

This is because banks lent irresponsibly to them and then, surprise surprise, when they couldn’t afford to make repayments of their mortgages they had to default on them on and let the bank repossess the house.

When this happens en masse, it increases the supply of available houses for people to buy and results in the fall of house values. This would create what we may consider a housing market crash in the short-term.

This situation is likely different because there are strong measures in place to ensure this never happens again, but that doesn’t mean that I’m not exceptionally concerned by this.

Inflation, inflation, inflation

As we all know, inflation continues to rise and is predicted to hit as high as 11% later this year by experts.

When inflation spirals out of control, one of the only things that can be done is to increase the interest rate. This is something that we have seen happen repeatedly so far over the last year or so with interest rates now 12.5 times higher than it was in December 2021 (0.1% to 1.25%).

This is an awfully large jump in such a short span of time and is the reason I am concerned for borrowers.

If you aren’t on a fixed rate mortgage, the interest you pay alongside your mortgage increases in line with this interest rate. So if the interest rate keeps getting increased in order to slow inflation, this means that you are going to end up splashing out more of your hard-earned money.

Now that wouldn’t be a problem because you would have been stress-tested for interest affordability using the affordability test. However, this is now disappearing later this year and does make me question how much of an issue it could be.

I’m not an expert

I am not an economist or an expert, but as someone who has also been looking at how the cost of living crisis is impacting us, I really do think this could cause problems.

Tie this in with the fact that many households are going to begin paying interest on their Help to Buy Equity loans, facing the increasing cost of everything, wages that are failing to keep pace with inflation, and a Government that doesn’t seem to taking any real action, and we have a perfect storm.

Optimism

I hate looking at the negatives of what may or may not happen, and hate sharing all of this with you even more. However, I think it is vital that we are all aware with what is going on.

I might be will and truly wrong, and I hope that I am. But unfortunately, I think that it is likely we will see a recession this year, and perhaps a housing crisis in a few years’ time.