Mortgages.scot

When you apply for a mortgage today it makes no difference what the actual rate of the mortgage you are looking at is. Affordability requirements mean that all borrowers must be able to meet mortgage payments if they were to rise to a certain level. The current rules are:

When assessing affordability, mortgage lenders should apply an interest rate stress test that assesses whether borrowers could still afford their mortgages if, at any point over the first five years of the loan, the Bank Rate were to be 3 percentage points higher than the prevailing rate at origination.

The Intention

The intention behind it was reasonable at the time. Even if someone takes out a mortgage with a rate of say 1.5% and it increases to 5% at any time in the future it was proven at application the borrowers would still be able to afford the payments.

This mean it was unlikely or less likely at least a new situation would arise where high levels of property were being repossessed or borrowers were struggling to meet their payments.

The Reality

This new stress test created issues for many either looking to purchase their first home, move home or even in some cases prevent them from moving to another lender for a better deal.

Buying a home

Some borrowers found that they could not get a mortgage at all or more often could not get a mortgage high enough to purchase the home they wanted or in a specific area.

For example, if a borrower was determined to have a budget of £1,000 per month for mortgage payments, a 25-year term and at a rate of say 1.75%, that would result in a maximum loan of £250,000.

However, the same deal but with a mortgage stress rate of 5.5% would reduce the maximum loan to £165,000.

Moving home

Many borrowers found themselves in the position where they once could afford the mortgage they have today, the new rules stated they could not afford it. So when trying to move home, even where the amount originally borrowed was not changing, the lender would not allow it as they did not meet affordability.

There have been changes here in recent years. Where there is no change to the existing mortgage lenders should allow borrowers to move home without forcing an affordability assessment.

It still does help those who need to borrow more no matter how little as they will still fail affordability checks.

Moving lender

For those with mortgages at a lender who is not as competitive as others in the market, they will find it near impossible to move to another lender as they will want to test affordability even if nothing is changing.

However well-intended the stress testing of mortgages have made it far more difficult for a significant number of borrowers.

Consultation Paper

The Bank of England recently set out a consultation paper on changing the way mortgages are stressed.

As with all consultations, they take time. The consultation will close on the 06th May 2022. If they do decide to take action it may take up to 12 months more for it to happen.

What is being proposed?

It is important to appreciate that this is not a complete removal of the affordability test, more a softening of how it is assessed. What they are considering removing is the underlined element below.

When assessing affordability, mortgage lenders should apply an interest rate stress test that assesses whether borrowers could still afford their mortgages if, at any point over the first five years of the loan, the Bank Rate were to be 3 percentage points higher than the prevailing rate at origination.

It is important to understand what that means first. When you apply for a mortgage you get an offer, on that offer it states that your mortgage rate, say 1.75% and this is fixed for 2 years.

It will also state what the rate will be after that fixed rate ends, often called the Standard Variable Rate (SVR) also referred to as the prevailing rate at origination. This is the standard rate for a mortgage without any sort of discount that you will pay after the fixed-rate ends assuming you do not apply for another fixed or discounted rate of some type.

At the time of writing Halifax states its SVR is 3.5%, so add 3% to that to get 6.5% and that is the rate at which they will stress your mortgage and you must be able to demonstrate affordability at this level.

It is the requirement to add 3% that is being considered for removal.

Now before anyone cheers, remember that it likely only going to be replaced with a lower stress rate, not remove it completely. It may only mean that a revised approach is to add 2% instead of 3%.

Whilst that may not seem significant it does make a difference. It could mean being able to afford a mortgage that is 10% higher than under the current rules.

Other consideration

Note that there are other options for borrowers. For example, where a mortgage is fixed for at least 5 years, lenders do not need to apply any stress test. So applying for a 5 years fixed rate of say 2.5%, affordability will be tested at 2.5% nothing higher. Some lenders are adding 1% to this, not all.

Updates

At this stage and until the consultation period ends on the 6th May 2022 we will not know much more. Once there is progress I will update.