Mortgage affordability ‘stress tests’ scrapped

All the spin and positive PR in the world can’t dress up the fact that the cost of borrowing is creeping upwards. In August 2022, the Bank of England actioned its sixth consecutive interest rate hike, with lenders quickly following suit to raise rates attached to standard variable, discounted and tracker mortgage products.

The Times sought to quantify how much more borrowers would be paying. It calculated that a typical homeowner with a £400,000 mortgage on a tracker rate will see their monthly payments jump by £99. Those with a £250,000 variable mortgage will pay £66 more every month.

Despite headlines concerning rising mortgage rates, a nugget of good news was recently released and Move Places guesses you may have missed it. Mortgage affordability tests were scrapped by the Bank of England at the beginning of August 2022. Also known as ‘stress tests’, mortgage affordability tests were introduced in 2008 after a catastrophic financial crash, designed to ensure there was a more responsible attitude to mortgage lending.

Banks, building societies and financial advisors were tasked with scrutinising the finances of potential borrowers, working out whether their outgoings, such as gym memberships, take-aways and even childcare cost, amounted to a financial security threat and would, therefore, prevent a borrower from meeting repayments.

The ‘stress’ side of the test forced lenders and advisors to calculate whether potential borrowers could cope if interest rates climbed by up to 3% (commonly 5% when stress testing for a buy-to-let mortgage). Between 2008 and July 2022, many borrowers were declined a mortgage based on a forecast interest rate, even if they could comfortably afford the repayments at the time of borrowing.

Today, mandatory mortgage affordability tests set by the Bank of England no longer exist, and it is up to each lender to impose their own tests based on their attitude to risk. The move to scrap mortgage affordability tests will help tenants who can prove they are already paying more in rent than a mortgage repayment would be, as well as the self employed and those working in a freelance capacity.

It is worth remembering, however, that loan-to-income tests are still a common part of the mortgage application process – when an applicant’s salary forms the base of how much a lender is willing to loan. The loan-to-income ‘flow limit’ also remains intact - this restricts the number of mortgages that lenders can grant where the loan is worth 4.5 times or more of the borrower’s salary. The continuation of this limit is highly regarded by economic experts as the biggest tool for keeping the mortgage market in check.

‘Must know’ mortgage facts

If you’re looking at properties for sale and need financing, the following will help:

• If your fixed-rate mortgage is expiring, you can lock into a new deal up to six months before it ends
• Allow enough time for any mortgage application to be processed – there’s often a high volume of applicants when rates are rising and delays could occur
• Remortgaging or taking out a top-up mortgage with your existing lender is often cheaper to arrange and quicker to complete, when compared to dealing with a new lender
• Weigh up the cost of the mortgage’s arrangement fee against a fixed deal’s interest rate – sometimes a higher rate of interest is cheaper than the arrangement fee itself when worked out over a fixed term.
• Pay attention to an early redemption penalty, especially when fixing for more than two years
• Remember that mortgage offers usually expire after three months so once you have made an offer on a property, do everything possible to avoid delays

Talk to Move Places if you want to get a property you own on the market and completed before Christmas. As an express sales agency, we concentrate on finding a genuine buyer who can proceed quickly, with back-up options including our auction sales or a cash offer. Contact us to learn more.