Mortgages.scot

The confusion around the removal of the affordability stress test is clear. Until lenders give their individual views on it by amending their policies we can assume that most if not all will simply remove it. What does that mean? How does it impact borrowers? A few have asked that, the question below was a simple and to-the-point one but it is really what everyone is asking.

My question is about the news that stress tests are being removed from mortgages. Does this mean we can borrow more money or is there any other benefit?

So I will break this down into a couple of parts, however, the spoiler alert is that it will have limited impact but it will definitely help some borrowers.

Loan To Income (LTI)

LTI has always been a factor when calculating affordability and will continue to be a factor. This is important as it creates a limit on how much you can borrow even if a borrower could prove they can service a higher amount.

The regulator sets a limit for lenders on LTI. They say that for all new mortgages given out over a rolling four-quarter period, no more than 15% of the mortgages should be higher than 4.5 times LTI. For most that 4.5x limit will apply.

If a couple has a joint income of £50,000 per year then the most they can borrow is £225,000. That is the hard limit set by LTI. Bear in mind that is borrowing, not the value of the property. The maximum loan size is £225,000 regardless of the property value.

Removal of the stress test

We will assume that lenders will simply remove the stress test and going forward will assess the mortgage payments at whatever the rate is. If applying for a 2-year fixed rate of 2.5% that is the rate used, it will not be increased at all for stress testing. Up until now or to be precise until 01.08.2022 they may have used a stressed rate of up to 7%.

What that does mean is borrowers will find it easier to meet affordability. For example, using the two rates above and looking at a £225,000 loan over 25 years on a repayment basis.

At 2.5% the monthly cost is £1,009
At 7% the monthly cost is £1,590

So that is £581 less the borrowers will have to find in order to meet affordability for a loan of £225,000 going forward.

Benefit

In some cases, borrowers would not meet affordability due to the high-stress rate of 7%. The result of that doesn't mean no mortgage at all, but it would have meant being able to borrow less.

Going forward that could change, saving £581 each month could now mean borrowers do fully meet affordability and can borrow the full amount.

No benefit

In the same scenario as above but where the borrowers were able to meet affordability at the stressed rate of 7% it makes no difference at all to them. They are still limited to £225,000 as a maximum loan by LTI due to their income level. So whilst they will of course meet affordability with a higher income surplus, that does not and never will translate into a higher mortgage due to LTI.

I say never, some lenders do offer higher LTI, up to 5.5x in some scenarios but it tends to be for higher-income earners.

Other possible changes

Ahead of lenders deciding what they will do there could be other opportunities. To be clear, the regulation will simply change to say no stress testing is required, that does not mean lenders should not stress test. It may be they will continue to use a stress test, but a reduce one.

There could also be a change to the way some lenders use LTI. Whilst the regulator does monitor this as noted previously, there is flexibility and in fact no higher limit to LTI. Although I don't expect to see much in the way of change here, to be honest. Not at the lower end of the retail market, that is income levels under £75k per year.

1st August 2022

What lenders intend to do will become clear soon. The stress test will be removed from 01.08.2022 and lenders will respond quickly as a result. I will update again once we see what they all do.