Need a bigger mortgage? The Bank of England has just helped you out
Bank of England changes lending rules
The technical details may be a bit mind numbing, but recent Bank of England changes to lending rules have just made it easier for you to get a mortgage of more than four times your annual income – the traditional amount banks are prepared to lend any individual.
Let’s go back to 2014 to explain why. This was the year the Prudential Regulation Authority (PRA) ruled that, in any one quarter, lenders could only offer 15% of their mortgages at more than 4.5 times a borrower’s salary.
The problem for lenders was that, because it can take a borrower more than three months to complete a mortgage application, they had to restrict high loan-to-income mortgages to about 13% of those offered – just in case an application spilled over into the next quarter. In other words, they had to give themselves wriggle room to avoid breaking PRA rules.
The PRA has now changed the rules to allow lenders to offer 15% of larger mortgages over a year, rather than a quarter. It doesn’t sound like a huge change, but they will no longer need to worry about applications not being made in the relevant quarter. In effect, they will be able to offer around 10% more borrowers a mortgage that is more than 4.5 times their income.
Can you get a larger mortgage?
Of course, just because banks and building societies CAN lend more, it doesn’t mean they will. Since the Mortgage Market Review of 2014, outgoings such as childcare costs, maintenance payments, car tax and insurance and credit card repayments have to be taken into account when deciding whether you can afford a residential mortgage. But it’s up to individual lenders to decide whether you could manage a larger home loan.
One other thing to bear in mind is that larger mortgages tend to require larger deposits. While you might secure a normal mortgage with only a 5% deposit, these larger loans demand at least 25% – and the best deals are only open to those who can cover 40% of the property value from their existing equity.
So, if rising house prices have so far put a new home tantalisingly out of reach, these new rules could help you – if you have enough money for a sizeable deposit and lenders think you are a good risk. But be careful: if interest rates were finally to rise, could you still handle those repayments?