The Bank of England has announced that the affordability test for mortgage lending will be ditched from August 1st. The test is used by lenders to establish whether prospective buyers can afford monthly remortgage payments on the cost of the property.
However, the Bank of England’s shake-up means that from next week, lenders will no longer have to check that borrowers could still afford their mortgage repayments even if their rate were to increase by up to 3% above their lender’s standard variable rate.
But how does this affect you and your chances of getting on the market? To help out, the mortgage experts at money.co.uk have put together a guide explaining what this change means for first time buyers, and their top tips and tricks to budget for your mortgage.
Claire Flynn, mortgages expert at money.co.uk said: “Given the cost of living crisis, the removal of the requirement for an affordability test likely comes as good news to many. That’s because it could allow more people to get on the ladder as they can take out larger mortgages.
“However, borrowers will still need to meet the loan-to-income ratio, which could still prevent some from getting the mortgage they require to buy a home.
“There is also a risk that with fewer restrictions, some buyers will take out loans that they are unable to afford. That’s why it’s integral to plan ahead to make sure you don’t commit to a repayment plan that you can’t manage.
“Budgeting wisely is key to this. Making a list of all your regular outgoings will help you find areas to cut back so you can save more money for your repayments. One way of cutting back is to try and find better deals with your day-to-day providers to help cut costs across monthly bills.
“It’s also important to be aware of all the costs that come with purchasing a property and making sure you have the money you need for this. As well as your deposit, you’ll need to pay legal fees, mortgage fees, the cost of furnishing your home and more.
“These costs can add thousands on to the real-world cost of your property. This is why it’s always worth taking a look at what’s on offer and comparing deals to ensure you choose the right mortgage for you.
“If you have enough savings it may be worth putting down a larger deposit, if you can, to save on your interest rates. For example, a 10% deposit will give you a wider choice of mortgage providers and deals, while a 5% deposit mortgage means you can put down less money up front, but often the interest rate will be higher.
“There are also a number of government schemes that can help you with your first home purchase. A Lifetime ISA can help you save for a deposit, with a 25% tax-free cash bonus added to the amount you put away.
If you meet the eligibility criteria, you can apply for the First Homes Scheme, which offers a 30% discount on the market value of new build homes. You can find out more about this government scheme on the gov.uk website.
“You may also be able to get a Help to Buy equity loan to help with the purchase of a new build property, but this scheme ends in March 2023 and reservations have to be made by the end of October to be eligible.
“Buying your first home can be a stressful experience, but a detailed review of your finances can ensure you create a realistic budget and choose the right mortgage for you.
“You can learn more about first-time buyer mortgages and find the right deal for you here: https://www.money.co.uk/mortgages/first-time-buyer-mortgages”.
