What is the stress test for mortgage borrowers? What does it indicate?
As with so much legislation, confusion surrounded the August 1st, 2022, implementation of new regulations. Potential mortgage applicants were expected to demonstrate their ability to continue making payments if the interest rate jumped by 3 percentage points above their lender’s regular variable rate.
The Bank of England acknowledged that the housing market has changed since the regulation was adopted in the wake of the 2008 financial crisis, with 100% mortgages no longer available. The policy was designed to protect borrowers from incurring unmanageable debt. As a result, the test was less accurate, resulting in mortgages that were frequently lower than those requested; therefore, it has been eliminated.
However, there are still two affordability requirements in place to safeguard both borrowers and lenders:
- The amount an applicant can borrow remains relative to their income; this is typically limited to 4.5x an applicant’s salary
- Passing the mortgage affordability test set by the Financial Conduct Authority. This takes future interest rises into its projections
In spite of recent hikes in interest rates, demand for mortgages remains robust, with some estate agents refusing property viewings to prospective purchasers who are not chain-free and do not have their finances in principle approved at the time they register an interest.