There is talk of relaxing the affordability rules on mortgage lending to make it easier for people to borrow more, particularly first time buyers who will hopefully see their earnings grow over their working life and therefore be able to afford higher repayments.
Although tempting, the rules are there for a reason – to prevent runaway house price inflation and, more importantly, to stop borrowers getting into distress should their financial circumstances change.
A bit like investments, earnings can go down as well as up. We all like to be optimists, expecting a favourable financial wind to blow and set us sailing happily through our lives. But if there is one monetary lesson to be learnt from Covid-19 it’s that sudden adverse financial change can hit us like a tonne of bricks and leave us on top of a pile of debt instead of a mountain of hope.
With that in mind, I would urge anyone contemplating a mortgage application to be realistic whether or not the rules on assessing affordability relax. Far be it for me as an estate agent to pour cold water on people’s home buying plans, but I would always tell buyers to seek proper financial advice. My agencies use an independent adviser who is a stickler for assessing affordability and that’s what I like to see. Being over ambitious about financial prospects can have painful consequences.
I always tell people that it’s better to buy what you know you can afford and trade up later on if, and when, the need arises. Many people judge status by the size of their house but that’s the wrong approach. Besides, if everything you earn is committed to paying off a massive mortgage then there’s nothing left for life’s little luxuries such as the holidays that many people now regard as an entitlement.
And there is always the delight of a growing family for younger property buyers and if everything they have is committed to paying for the roof over their heads they will have nothing left for the extra mouths they have to feed.
So if the stress test rules are relaxed for mortgages, bear in mind that the new regime may bring an unwanted stress test for your budget. It’s true that most borrowers change mortgage product as their fixed rate deal expires and if your earnings have grown you will always find a better mortgage. There are currently more mortgage schemes available than at any time since the financial crash in the first decade of this century.
While that tells you we are recovering, it also reminds you that problems can strike when you least expect them. And if your earnings have shrunk, that tempting fixed rate you signed up to will be replaced by possibly a variable rate deal that’s more expensive because you don’t meet the affordability rules to let you change to a better product.
It’s perverse, but earning less can actually lead you to paying more. Be aware of that when you set your house-buying budget.
Colin Shairp Cert Res EA FNAEA AGPEA,
Director, Fine & Country South East Hampshire & Emsworth.