Politics and BoE independence

[Suff]

They said it would remove politics.

So I read, today, that the BoE is removing a mandatory affordability test for mortgages. Essentially they are removing a test which means that potential mortgage applicants must prove they can withstand a 3% change in the interest rates on the mortgage.

Now if they had decided to do this 5 years ago it would have made sense. Interest rates were low, low, low and everyone believed they were in control and they would remain low.

But now? The US has put rates up 1.5% in two months alone. The entire mortgage market is rising fast. The BoE is going to be forced to raise rates longer and faster than they expected because inflation is out of control. The only reason I can see for removing this very sensible constraint is the political pressure to keep the house market moving during this time of inflation. Because if the house market were to collapse the negative equity would lock owners into spiralling mortgage rates and costs with no way to sell and downsize out of trouble.

Independence with a small i.

[Workingman]

At one level it makes it slightly easier for some to get mortgages, but the loan-to-income limits rule remains, so there are still restrictions.

And lenders can still use some form of testing according to their own rules, so it will not be a free-for-all.

The hardest part of home ownership is building a deposit, especially for those who are renting at more cost than the mortgage they hope to get. That is madness!

It's rents that need looking at, and that really is a political not a BoE issue, and one that no party seems to want to get involved in.

[Kaz]

The hardest part of home ownership is building a deposit, especially for those who are renting at more cost than the mortgage they hope to get. That is madness!

It's rents that need looking at, and that really is a political not a BoE issue, and one that no party seems to want to get involved in.

This, 100%

[Suff]

The point was that this measure was supposed to ensure the BoE had scope to move interest rates by a Very large margin without impacting mortgage owners.

Now the BoE is actually moving interest rates by a Very large margin, they remove this safety valve. Which, to me, is politically motivated.

[Workingman]

My point was that mortgage "owners" and those wanting a mortgage will be impacted by any interest rate rise. It was always thus. Myself and the ex lived with our families and put every spare penny into a joint account to save up for a deposit. That is how it was done back then.

Today couples want to move in asap and so rent. Today's rents are way more as a % of earnings and mortgages than they were back in my day - that needs addressing.

The BoE can move interest rates any time it wants, no politics required. Getting rid of the "stress test" for mortgages is a minor problem. If people can't afford it, or if lenders don't lend, then they don't buy.

[Suff]

Going back to the financial crisis, the main problem was people who took subprime mortgages and loans, at high interest rates who could not afford them. Also the banks betting their net worth on these higher return investments.

This BoE stress test was supposed to protect the banks from bad loans whilst ensuring they had the flexibility to move rates quickly in response to a crisis. i.e. they didn't have to worry about triggering a fresh banking crisis if they suddenly moved rates.

The removal of this stress test is in direct opposition to the very reason it was set up in the first place.

[Workingman]

According to the economic experts paraded by the media the stress test was obsolete due to the loan-to-income limits introduced in 2014 or thereabouts.

I don't know.

I remember rates of 12% so a huge rise to 2.35% must be a disaster! Right?

[Suff]

I remember rates of 12% so a huge rise to 2.35% must be a disaster! Right?

I remember that and higher. But it went up to 12% from 10%. A mortgage rate at 0.25% is going to cause more pain moving to 2.35% than a rate going from 10% to 12%. Because at 10% high rates are already a factor and being able to afford them is locked in.

At 0.25% rate changes are considered to be a low risk. Because rates don't move that fast from so low....

Right?

Perhaps loan to income limits do work. But removing a solid protection against sudden rate swings at the time of sudden rate swings doesn't ring true. If they had removed it in 2014, no big issue, one regulation being replaced by another.

Removing it now? Doesn't sit so well.