Housing bubble warning: Bank of England to relax mortgage rules | United Kingdom | New

The rules, introduced in 2014 in the wake of the financial crisis, are being reassessed as part of a review of market restrictions that ends next week. The authorities are reportedly considering relaxing affordability controls for borrowers.

One way to do this, currently being considered, is to reduce the additional interest charge that is used to test borrowers’ ability to pay the reversion rate after the end of an initial agreement – which specifies a fixed interest rate. -.

Under the rules, lenders must verify that homebuyers can afford repayments after any initial interest rate deal ends by testing their ability to pay a higher rate, which is currently 3% higher. at the bank’s standard variable rate.

Checks are designed to make sure borrowers aren’t too vulnerable to potentially higher interest rates in the future.

However, interest rates have remained at lows for much longer than officials anticipated when they introduced the rules, meaning a 3% hike in the base rate now seems unlikely. .

While the rules would benefit first-time buyers, economists warned that the changes risked creating a real estate bubble, pushing real estate prices to “unsustainable levels”.

A real estate bubble occurs when the price of real estate exhibits a strong and persistent deviation from fundamentals, such as income, economic growth and population migration.

It is characterized by temporary periods of high demand, low supply and inflated prices, which creates instability in the housing market – and the economy as a whole.

It comes as house prices soared 12% in the 12 months leading up to September after being boosted by lower stamp duties, a faster pace than before the financial crisis.

READ MORE: Eurozone on alert for new financial crash

“This would help perpetuate very strong demand which could push prices to unsustainable levels.”

He warned that prices could undergo a “correction” and collapse if growth continued at its current rate.

He said: “This is exactly when we probably want this affordability test to make the difference and slow down the most stretched loans a bit and cool things down a bit.”

But David Hollingworth, of L&C Mortgages brokerage, said the current rules are especially tough for first-time buyers who typically have to build up a large deposit and then stretch out to get a large mortgage to access the scale. lodging.

Meanwhile, Martin Beck of the EY Item Club described the potential rule changes as “strange given the flexibility of mortgages,” adding, “It hasn’t been difficult to get a loan.”

But he said changing the rules after the stamp duty holiday ends means officials “don’t add fuel to the fire; they support the market at a time when headwinds are forming ”.

Officials are also re-examining the rule that limits lending to buyers borrowing more than 4.5 times their income, according to the Telegraph.

Express.co.uk is approaching the Bank of England for comment.

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