Bank of England plans to end mortgage interest rate rule | bank of england

The Bank of England has announced plans to ease mortgage rules, which could help thousands of first-time buyers move up the real estate ladder.

The central bank has said it wants to remove a requirement that borrowers be able to afford a three percentage point hike in interest rates before they can be approved for a home loan.

Removing this requirement could help 1% of renters in Britain – around 50,000 people – who are unable to meet the affordability test. Another 6% of mortgage borrowers – around 35,000 people – could also have gotten a larger loan if the rule had not been in place.

In a development that comes amid a spike in house prices during the pandemic, the bank said a rule limiting some new loans to 4.5 times a borrower’s income, along with criteria for The separate accessibility set by the Financial Conduct Authority, were sufficient to guard against excessive risk in the mortgage market.

He will consult on the change in the first half of next year, as part of an overhaul of measures first introduced in 2014 after the 2008 financial crisis to curb excessive risk-taking by large lenders. Street.

Andrew Bailey, the Bank’s governor, said removing the affordability requirement should not be seen as relaxing lending standards, as the rule limiting some new mortgages to 4.5 times the income of borrowers was the main constraint on riskier loans.

“We don’t see this as a relaxation of the rules, but rather a point of effectiveness, because now having a body of evidence going back about seven years now, we were able to make a much more substantial judgment on the effectiveness of them. tests, ”he said.

Speaking as the Bank released its regular financial stability report, Bailey said the UK financial system is well equipped to deal with a potential new economic downturn caused by the emergence of the Omicron coronavirus variant.

“At the moment, I don’t think we are in a situation where there is any kind of stress around the corner in terms of the markets,” he said, noting that global financial markets had moved in. due to the Omicron variant but had failed to approach stress levels similar to those seen in early 2020 when the pandemic first spread.

“I don’t think it’s going to be a big stressful event,” he said.

Publishing the results of its annual banking system stress tests, Threadneedle Street said the UK’s eight largest banks have sufficient resources to continue lending to the UK economy in a more severe downturn than that of 2020. .

The Bank said it would require lenders to hold around £ 11bn of capital to guard against future shocks by reintroducing its “countercyclical capital cushion”, a rule that requires banks to have a capital buffer. sufficient capital to absorb losses. The buffer will be set at 1% with an implementation period of 12 months.

He said he expected to announce a further increase in the cushion to 2% – which equates to around £ 22bn of capital – if the economy continues its recovery as hoped by the middle of the market. next year.

Threadneedle Street canceled its stress tests last year during the first wave of the pandemic, saying bank resources should be aimed at supporting households and businesses during the emergency.

The tests, first undertaken in 2014, were developed after the 2008 financial crisis to determine whether the UK’s largest banks could continue to lend during a recession.