Mortgages.scot

Background

If you were not aware of the interest rate stress test carried out then take a look here for some detail.

I also covered more on the decision to remove the test in this article.

The stress test

If memory serves the first stress test rate I recall using was 6.24%. Regardless of the actual mortgage rate at that time which was often less than 2%, I would still have to test a borrower's ability to meet payments should the rate ever increase to 6.24%. If they couldn't then no mortgage would be given or the amount of borrowing had to be reduced.

At that time it was seen almost as an outrage given the historic and expected future BoE interest rate that such a test was required. That was in 2014. Here we are in 2020 and mortgage rates at 6.24% don't seem all that unlikely.

Of course, there are many variables for someone borrowing back in 2014 but specifically.

• What has happened to their income?
• Have their general costs increased?

For someone borrowing in 2014 who has seen regular increases in income even with increases in outgoings then increasing rates are unlikely to have the same impact today as they may have been modelled back in 2014.

For others who have experienced a decrease in income coupled with increasing costs the position is likely quite different. Those borrowers may well be showing signs of struggling as rates go up. They may have experienced significantly more had they been allowed to borrow more as a result of not having a stress test.

My view is that the stress was appropriate at a time when interest rates were at their lowest and we are seeing proof of that today.

The impact of increasing mortgage rates would be lessened had it not also been for the general cost of living increases which appear off the scale for many.

Early view and changes

So far no lenders as far as I am aware have withdrawn the Interest Rate Stress Test. Whilst it is still early days following the change I would expect to see lenders making changes if they believe it was a good thing.

I don't believe lenders are viewing this as a positive step given the cost of living crisis, rising property prices and so on the country is facing at the moment. That is why we are not seeing it being removed.

I suspect many if not all lenders see the removal of the stress test as something they simply can't stand support in a time when interest rates are rising MPC meeting after MPC meeting and there is a reliably predictable end in sight. 3% is currently the prediction for 2023.

For someone with a £200k mortgage that had a 2% rate which could increase above 5% at the next rate switch could mean another £300 per month along with significant increases in their energy bills of another £200 per month or more. That together will hit hard for those that have seen little, no or a reduction in income.

Getting a mortgage today

It should come as no surprise that lenders are changing their affordability tests to account for the cost of living crisis. Applicants today will find it harder as lenders increase the amount of essential expenditure required to get a mortgage without adding increasing rates into the mix.

With property prices increasing there is really no good news at present for borrowers in general.