There are experts calling for new affordability rules for homeowners seeking to remortgage. The changes called for vary, but the focus is to keep homeowners from struggling to make their repayments. Due to inflation levels not seen in decades and higher interest rates, household budgets are strained. It is not only in the best interest of homeowners to pay their repayments and remain in their homes, but it is in the best interest of our economy and our country that there is not a wave of homeowners ejected from their homes due to their inability to pay.

One idea that has been suggested is that homeowners be allowed to shop more competitively for a remortgage. It would allow them to shop for the best low interest rate remortgage they could discover and perhaps make their repayments affordable.

There are millions of homeowners that have recently had their mortgage term end or are close to having their mortgage term end. Many are coming off a two-year term fixed rate deal. Considering the difference between the interest rate offerings of two years ago and now, it is easy to see the shock that would occur to a budget that once found their repayments affordable.

Last year at the start of December, the long and steady pandemic induced standard base rate of the Bank of England was 0.1%. The level was an all-time low in the over 300-year history of the Bank. First time home buyers with mortgages and homeowners that remortgaged during the time of the historic low which lasted from 2020 to almost the end of 2021 chose from very affordable interest rates. 

Now all that has changed.

The Bank of England’s Monetary Policy Committee (MPC) in response to rising inflation increased the base interest rate in December 2021. From that point on, the MPC has voted to increase the base interest rate at each of the last seven consecutive meetings, counting last December. Throughout this year, the rate increases were 0.25%, except for the last two meetings in which the rate hikes were increased to 0.50%.

There was not a meeting in October, however there was plenty of friction in the economy. The tax cuts and mini-budget announcement caused a discussion of the need to make the next base rate increase more aggressive to control inflation and perhaps a 1.0% hike would be necessary.

Now, there have been changes which have lessened the expectation of a whole point increase, but there are many that are forecasting for a rate hike of 0.75% on 3 November. The MPC meeting will be held only days following the government budget announcement on 31 October. The MPC will make a decision in response to the budget information in an effort to weaken the inflationary pressures on the economy.

While only a small percentage increase could have a major impact on a household budget, the point is that there is another increase coming and it is not expected to be the last. It was reported by Moneyfacts, a data company, that since the day of the mini-budget announcement, the average two-year fixed interest rate offering has increased from 4.74% to 6.65%. The increase to a repayment for a new home buyer would be an extra £320 in monthly repayments due to the rise in interest cost.

The average fixed rate offer on a two-year term is at 6.65% while the Bank’s standard base rate is 2.25%. With an increase from the November meeting to perhaps 0.75% it would put the base rate at 3.0%, the average two-year fixed rate could rise to perhaps 8.0% or more. 

When a homeowner comes to the end of their current mortgage term they can choose not to remortgage and will be put on the lender’s risky standard variable rate (SVR) which is subject to increases and is normally a much higher interest rate than rates offered with remortgages. 

The homeowner could seek to avoid paying more than necessary and shop for a remortgage. If they do not increase their loan amount and stay with their same lender, an affordability test is not required. However, if they choose to go with a new lender that perhaps is offering a lower interest rate, they will have to qualify through affordability rules. Affordability tests would also apply with the current lender if the homeowner sough additional funds with their remortgage.

Experts are seeking a change in the affordability rules from the Financial Conduct Authority (FCA). One suggestion is to allow homeowners to seek a remortgage with any lender without facing affordability testing if they simply seek the same loan amount such as is the case if they remortgage with their current lender. It would allow homeowners to seek the best deal from other lenders and perhaps it would lead to the repayment being affordable.

There are other suggestions that are being expressed as a solution that could provide relief and an answer before the damage occurs since the expectation is for the now 2.25% standard base rate to be more than double next year with it reaching at least 5.0% as the MPC battles inflation that is now over 10.0% and more than five times the target rate of 2.0%.