What will the removal of mortgage stress-tests mean for you?
As from the 1st August, the high street banks and building societies will no longer be required to what is known as stress- test customers when working out how much to lend. This is an affordability test based upon interest rates rising in the future. The test meant that a borrower could still afford their loan at the end of the short term (typically ending between 2-5 years) and lenders worked this out from the revert to rate, which is the standard variable or tracker rate after this period however, as a caution added three percentage points extra to this.
As an example to the above, a borrower taking out a two-year fixed-rate mortgage at 2.2% with a revert to rate of 4% would need to show they could afford the monthly repayments on a rate of 7%.
These rules were enforced after the 2007-2008 financial crash which had followed years of unrestrained lending. Prior to this in the same decade, 100% mortgages had been available and could easily be taken out on an interest only basis sometimes even with no proof of income.
More recently, many within the industry have complained that stress testing to this level was just too restrictive and has prevented genuine borrowers who could afford a mortgage from obtaining one.
Scrapping this test, may help customers who have been refused mortgages that are cheaper than them renting each month. For example, someone who is paying £1000 in rent each month, may have been refused for a £600 a month mortgage.
Manchester Money feel that this is great news for would be buyers who may have been stuck in the rental market or living at home with family. This opens the mortgage market up however responsible lending will still be paramount as the fall out from the 2007- 2008 financial crash saw may casualties in the way of home repossessions from lenders and neither brokers or lenders would want to put customers at risk. Banks and building societies are still restricted on how much lending they can do above 4.5 times salary.
The Financial Conduct Authority will still insist on stress tests but under their rules, borrowers will be checked on affordability one percentage above the rate that they will move on to after their short-term ends. It is also down to individual lenders to decide on their own lending practices so one bank or building society may be different to another in terms of what you could borrow. Using a broker like Manchester Money helps filter out the best deal for your circumstances.
Have you been affected by this issue historically and would this be welcomed news for you?
We do need to think that mortgage rates on a steady incline however, ultimately this may start to even out the removal of the three percent stress test. We welcome anyone looking to buy a property in the future to get in touch for further advice.
Source The Guardian 02/08/22