Mortgages.scot

Background

Earlier this year I wrote a post about a consultation being carried out by the Bank of England. They considered whether the current mortgage stress test was appropriate. You can find out more here.

The Change

From the 1st of August 2022, the mortgage stress test will be removed. At present lenders have to test a borrower's ability to afford a mortgage if rates were to increase. Take a lender's standard variable rate and add 3%. Even if a borrower takes a 2-year fixed rate at say 2.8% a lender will test the borrower's ability to make payments at a rate as high as 7.5%.

That is the element that is being removed. So going forward the lenders will only test the ability to meet payments at 2.8%. Whilst this will help many borrowers it does not mean a wild west free for all.

LTI - Loan to Income

Before stress testing lenders relied on LTI to limit borrowers' maximum mortgage amount, that is what will return.

For example, a lender may now suggest a borrower could get a mortgage of up to 4.5x income. Earning £50k pa that would result in a maximum theoretical mortgage amount of £225,000.

It may not be all good news. Lenders are still limited by what is referred to as LTI flow limits. Currently, all lenders must limit the amount of new lending greater than 4.5x to 15% of their new lending. This is monitored over a rolling 4 quarter period.

There may be changes to this, but nothing has been mentioned so far. But it does give lenders the flexibility to offer higher than 4.5x LTI to some borrowers. This exists today.

Testing Affordability

This change does not mean the removal of affordability testing. All other elements of the affordability test will remain. So whilst an amount of £225,000 could be borrowed at 4.5x salary this will depend on other commitments a borrower has. Got a car loan? Credit Card debts? These will still drive down the maximum amount that could be borrowed.

Market reactions

Some have said it is not as reckless as it may sound given LTI limits remain in place. Others have questioned the timing of the change.

The stress test was brought in for the very reason we are experiencing right now. Unexpected increases in the base rate. Given we are seeing exactly that and everyone is predicting many more increases over the next 12/24 months, it seems odd that it is being removed at a time when it is needed most.

Other argue it is a good move to help many borrowers and this change does not automatically change the way lenders look at what and how they are lending.

Quick Change

Given this change is happening in just around six weeks we can be sure lenders will look to implement the change quickly and we can expect to start seeing lenders' interpretations to this very soon. I will update you when they do.