Banks plan 50-year mortgages: Bank of England to relax mortgage rules to help first-time buyers in move that could send home prices higher
- Bank of England widely expected to relax mortgage rules
- Easing restrictions will make it easier for borrowers to obtain larger loans
- It is likely to add fuel to home prices, which have already risen to record highs
The Mail on Sunday has learned that mortgage lenders are preparing to launch a range of new products with fewer hurdles for borrowers and fixed rate terms of up to 50 years.
The Bank of England is widely expected to ease mortgage rules as soon as tomorrow. Relaxing affordability restrictions will make it easier for borrowers to get loans to buy larger homes.
This move will allow buyers to borrow more at an early stage, opening the market to younger buyers. But it will also likely add fuel to home prices, which are already at record levels.
All changes: The Bank of England is widely expected to relax mortgage rules
Perina, the new lender awaiting approval for its banking license early next year, plans to launch initial 30-year fixed-rate home loans. She plans to offer mortgages for 40 and 50 years later.
It will also allow some homebuyers to borrow up to six times their income. That compares to less than five times the earnings of the vast majority of homebuyers today.
The plan closely follows the introduction of a 40-year fixed-rate product by mortgage lender Kensington, meaning that borrowers will not be affected by any increase in interest rates for four decades.
“When I took out my first mortgage, I was in my mid-twenties,’ said Colin Bell, co-founder of Perenna. This is not happening nowadays because people find it very difficult to climb the mortgage ladder.
But if I’m 25 and you offer me 50 [fixed rate] The mortgage that brought me to 75, it’s not a bad thing to have.
“We would like to get people up the ladder early because the problem is that housing prices keep rising above wages, so deposits go up.”
Understandably, the Bank of England is considering whether to allow lenders to increase the percentage of large mortgages they make to people who need to borrow more than 4.5 times their salary.
Many think that the affordability test – which checks whether a borrower can pay the lender’s standard variable rate plus 3 percent – is too cumbersome.
The bank imposed affordability rules in 2014 after the financial crisis to ensure that borrowers would be able to make mortgage payments if interest rates rose.
However, mortgage experts say there is a strong case for loosening the rules because interest rates are weakening at a record low of 0.1 percent.
This move will be a huge boost for home buyers, driving up home prices.
Data released last week showed house prices were rising at their fastest rate in 15 years, with the average home costing £272,992.
Analysts at Bank of America said they see a “strong case” for loosening the rules and “supporting mortgage market growth”.
Even a small adjustment to the affordability rules could add 2 per cent to mortgage growth – the equivalent of an additional £32 billion a year, said Alistair Ryan, an analyst at Bank of America.
He added: “Agreeing to relax the rules … may indicate that the Bank of England is not interested in rising house prices.”
The Bank of England is also scheduled to release the results of annual stress tests on banks.
These are expected to show that banks have strong capital cushions – paving the way for more lending.
Andrew Wishart, of Capital Economics, said that if the 3 per cent test on mortgage affordability was lowered to 2 per cent, buyers would be able to borrow 10 per cent more.
However, he added, “We believe it is unwise to relax mortgage lending rules, particularly when inflation and interest rate expectations are uncertain.”
The changes could come as the mortgage market is on track to publish a record year for mortgage lending, at more than £300 billion.
Perina plans to use the bonds to finance her home loans, which Bell said is “unique in the UK”. He said the price on a 30-year agreement would likely be somewhere between 2.5 per cent and 3.5 per cent.
Some economists said they expect the central bank’s key rate not to increase until next year due to the spread of the Omicron Covid variant.
“Omicron’s concerns are likely to push the first rally into February despite mounting indications of stronger inflationary pressures,” said UBS analysts.
“While a rate hike next week cannot be ruled out completely, most bets are off that the bank will raise them soon,” said Susanna Streeter, senior investment and markets analyst at Hargreaves Lansdown.