New mortgage rules explained: What they mean for house buyers, how much you can borrow and will prices rise

• Changes to mortgage affordability rules mean house buyers can now borrow around 13 per cent more
• This could help up to 80,000 more first-time buyers get on the property ladder, analysis suggests
• But it could push up house prices by as much as £19,000

New mortgage rules could help up to 80,000 first-time buyers take their first step on the property ladder, analysis suggests.

But they could also push up the average house price by as much as £19,000, research by Savills shows.

What are the new mortgage rules, and why have they changed?

Mortgage lenders are required to carry out affordability checks on borrowers to ensure they can cope with interest rate rises or changes in their circumstances.

But concerns were raised that the restrictions in place were unduly limiting the ability of some borrowers - especially first-time buyers - to secure loans even when the repayments were affordable.

The Bank of England changed its guidance in March, meaning lenders are no longer required to ‘stress test’ borrowers at the Standard Variable Rate plus one per cent, if borrowers take on a fix of less than five years.

The Financial Conduct Authority advised the same month that firms had the ‘flexibility to design their test ‘in a way that is appropriate for the customer's mortgage’.

“Many firms add a margin to the lender’s current reversion rate,” it added. “With interest rates currently falling this may be unnecessarily restricting access to otherwise affordable mortgages.”

How have lenders reacted?

A number of mortgage providers have already changed the way they apply the affordability test, increasing the amount buyers can borrow.

Santander was the first to do so, at the end of March, reducing affordability rates by up to 0.75 per cent, which it said meant customers could borrow between £10,000 and £35,000 more than before.

That meant first-time buyers with a joint income of £49,500 could now borrow up to £210,000, rather than £197,000, based on a two or three-year fixed mortgage, while existing homeowners earning a combined £63,500 could borrow up to £278,000, up from £260,000.

Lloyds Banking Group, which owns Halifax, followed suit in mid-April, saying the changes meant typical customers could now borrow around 13 per cent more, which worked out at roughly £38,000 extra for a family with a household income of £75,000.

HSBC said later that month that its own changes meant a first-time buyer would be able to borrow up to £39,000 more, while NatWest said a typical family would now be able to borrow up to £33,000 more.

In May, Nationwide announced its own changes, which it said meant applicants could borrow on average £28,000 more.

How much more can house buyers borrow?

As you can see from above, how much more house buyers can borrow depends on the lender and their own circumstances.

But Savills worked out that first-time buyers with a household income of £62,000 would be able to borrow an extra £25,900, which is 12.8 per cent more than before, if stress tested affordability is reduced from 8.25 per cent to 7 per cent.

It said the relaxed lending rules were expected to increase the number of first-time buyer transactions by between 47,000 and 80,000, or 14-24 per cent.

What impact will changes have on house prices?

Savills has calculated that the new mortgage rules could cause house prices to rise by an extra 5 to 7.5 per cent over the next five years, on top of the increase already forecast for this period.

“Relaxed lending rules will certainly change the course of travel for the housing market in the medium to long term, but there will be a strong interplay between the extent to which house prices and first-time buyer transactions increase,” said Lucian Cook, head of residential research at Savills.

“The more increased borrowing capacity impacts prices, the less impact there will be on transactions.”

He added that the impact would not be felt immediately but over the course of the next five years.

The current uncertain economic outlook would likely make buyers less willing to take on substantially more debt in the short term, he said.

Based on mortgage changes increasing borrowing capacity by £25,900 for first-time buyers with a joint income of £62,000, Savills said this could increase house prices by between 5 per cent and 7.5 per cent, or £12,950 to £19,425.

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