Bank of England Move To Keep House Price Bubble Inflated
July 23, 2022 (EIRNS)— At the end of June, the Bank or England announced that following its review of the mortgage market, it would withdraw its recommendation for lenders to apply an “affordability test” to mortgage applications.
Introduced in 2014, the affordability test specified a “stress interest rate” for lenders when assessing prospective borrowers’ ability to repay a mortgage. The aim was to ensure that house buyers could cope with a 3 percentage point rise in interest rates. The 4.5% household income limit will remain in place.
Nevertheless, this change comes into effect on 1st August, just as pressure builds for the bank to continue raising interest rates. The Bank of England base rate is now at 1.25% following several 0.25 point rises. At the recent Mansion House gathering in the City of London, Bank of England Governor Andrew Bailey hinted that a 0.5 point rise is possible, perhaps as soon as next month.
With mortgage rates sitting around 2% above the base rate, the requirement for banks to apply a stress test based on 3% on top of that would have ruled many out of the mortgage market.
However, there’s no need for concern, say the banks. This won’t result in a situation as seen in 2008—they have bigger capital reserves now, and they rely less on volatile wholesale funding markets to finance lending. “I’m all right Jack.”