mortgage stress tests

Mortgage stress tests to be scrapped in August: how could this affect you?

Borrowing to buy property could become easier for many as the Bank of England plans to remove mortgage stress tests this summer after eight years.

Since 2014, lenders have been required to carry out a particular set of ‘stress tests’ on each mortgage application as a way of ensuring affordability. The criteria was brought in as a reaction to the financial crisis as a guard against people taking on too much borrowing.

At the moment, mortgage stress tests are set at 3%. This means that borrowers must still be able to afford their mortgage repayments should their rate increase to 3% above the lender’s standard variable rate (SVR).

But last week, the Bank of England announced the decision to abolish these stress tests, which should make it easier for borrowers to access mortgages. The move will take effect in August this year.

Removing mortgage stress tests will increase affordability

The effect of removing the current criteria will loosen up the lending market for many. Stress testing will still apply, including the loan-to-income ratio, which currently means banks must limit the number of mortgages they offer at 4.5 times a borrower’s salary.

Each lender will still assess mortgage applications on a case-by-case basis. Many have already taken higher bills into account recently, for example, as well as increased national insurance rates. 

The move has been met with some positivity in the market. Chris Sykes, technical director at Private Finance, said it was “great news for borrowers that were becoming increasingly tight on affordability and it is limiting their borrowing power with each change to affordability calculators”.

Bank of England figures show that the mortgage stress tests won’t necessarily make much difference overall, with only 6% of people taking smaller mortgages than they otherwise might have as a result of the 3% rule, over the past year.

Mark Harris, chief executive of mortgage broker SPF Private Clients, says: “Scrapping of the affordability test is not as reckless as it may sound.

“The loan-to-income framework remains, so there will still be some restrictions in place; it is not turning into a free-for-all on the lending front.

“Lenders will also still use some form of testing but to their own choosing according to their risk appetite.”

Rising costs for some buyers

As interest rates continue to rise, increasing affordability for mortgage borrowers could mitigate some of the effects and keep the housing market afloat despite rising household costs.

Lawrence Bowles, director of research at Savills, said: “From a market perspective, removing the current stress testing could mitigate some of the impact of higher interest rates. 

“In theory, at least, it should open up a little more capacity for house price growth than is currently looking fairly constrained in the mainstream housing market.”

Others have more reserved opinions on the new criteria. For example, James Briggs, head of personal finance intermediary sales at specialist lender Together, said: “While this could mean more first-time buyers are able to overcome strict lending criteria barriers, there are fears this move will only further inflate the market as demand outstrips supply and wage growth.

“With consumer confidence at an all-time low and mortgage rates on the rise, buyers may be more hesitant in increasing their debt and instead may shift their financial priorities towards battling rising household costs.”

Buy-to-let stress tests

For property investors and landlords purchasing property using buy-to-let mortgages, the stress testing criteria is slightly different. 

Often, lenders stress test applications against mortgage rates of 5% or 5.5%, in order to ensure landlords could afford repayments, despite the fact that typical rates have been much lower than this for several years.

As well as these mortgage stress tests, buy-to-let lenders also normally require a buffer of 125%. This means the rental income must make up at least 125% of mortgage payments each month.

You can use this buy-to-let mortgage calculator to work out what you might be able to borrow, which will be subject to change once the new rules apply from August.

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