Mortgage Lending Review: What Does it Mean for Investors?
This week, the Bank of England is considering relaxing mortgage lending rules that have been in place since 2014. For those looking to invest in property, securing a mortgage could get much easier.
What are the current mortgage lending rules?
In 2014, during the midst of a financial crisis, the Bank of England placed tighter lending rules to avoid another crisis and protect buyers. If you have attempted to secure a mortgage before, you may be familiar with the current system.
In order to make sure buyers can afford future payments, banks will assess whether the buyer can pay the loan back with a hypothetical 3% added to the standard amount. Then, if interest rates were to go up, the buyer can be confident they can cover the payment with higher rates.
However, it is expected that this week, the 3% safety net could be reduced or diminished. Thus, making it much easier for homebuyers and investors to secure a mortgage and buy a property.
What is the reason for these changes?
Despite mortgage rates being at an all-time low, it has been very difficult for first-time buyers to step onto the property ladder in recent months. Data from Aldermore’s first-time buyer index revealed around 45% of first-time buyers were rejected for a mortgage on their first try.
With others (20%) revealing they had been rejected multiple times. Overall, just over a third of first-time buyers were accepted on their first try. This is a drastic decline compared to pre-pandemic months. In March 2020, nearly half (48%) had offers accepted on their first try.
This is due to several factors; credit issues being a huge concern. Also, this was exacerbated by employment disruption and furloughed workers. Consequently, many first-time buyers are experiencing difficulties securing a mortgage.
What will be the impact of the new mortgage lending rules?
Essentially, by removing the 3% threshold, securing a mortgage will get easier. If you are on the borderline of being able to afford a mortgage, softening the rules will work in your favour. Not just homebuyers, but property investors too. If you are a first-time investor experiencing issues securing a mortgage, the new lending rules will benefit you.
In terms of house prices, as we know, they are currently soaring. Experts are questioning whether these new rules will create an unsustainable level of growth. Loosening mortgage lending may drive house prices up further which, ironically, would push more people out of the market. Many experts have called for a focus on building more houses, rather than building more demand.
What does this mean for property investors?
If these plans go ahead, property prices are inevitably going to rise. Therefore, if you are a property investor, we would advise stepping onto the ladder as soon as possible. By preempting these new rules, investors can be prepared to take advantage of them. Also, cheap borrowing rates are still accessible following their all-time low in the first half of 2021. Therefore, there has never been a better time to invest in property.
It is also worth noting, house prices rising might be a negative for buyers, but for investors, this equates to higher capital appreciation. Thus, higher returns when they eventually come to sell the property.
In particular, buy-to-let investors will benefit most. Skyrocketing house prices will tie down many tenants to the rental market. As the housing market becomes expensive, the buy-to-let market will thrive. Demand will be much higher for rental properties, reducing void periods and maximising returns for investors.
To summarise, the new mortgage lending rules appear to be a huge positive for property investors. Not only will it make borrowing money easier, but mortgage rates are already at an all-time low. Also, the pressure this will put on house prices ensures an investment property will soar in value. Therefore, when you come to sell the property in years to come, returns will be much higher.
We would advise stepping onto the investment ladder now to achieve maximum returns.
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