Homebuyers are set to face stricter borrowing tests when applying for a mortgage given the new affordability rules announced by the Bank of England in its Financial Stability Report published last month.
As part of the new ‘stress tests’, lenders will have to apply a calculation using a 3 percentage point increase to their current Standard Variable Rate to make sure borrowers can afford to make their mortgage repayments if the rate were to climb. With the average SVR currently being 4.54%, this would result in an affordability rate of 7.54%.
Why Are the Changes Being Made?
The Bank of England is concerned about the number of increasingly risky loans that are currently being agreed at record low-interest rates. Its biannual Financial Stability Report found that the value of credit card debt, personal loans and motor finance have all grown over the last 12 months – at a faster rate than household income.
This has prompted concern that borrowers could struggle when interest rates inevitably start to rise.
The BoE is worried that in the current benign conditions, lenders could be lulled into a false sense of security and agree risky loans, which could threaten the stability of the UK economy. The result could be a crisis like we saw in 2007. Introducing the new rules will ensure borrowers can afford to make the repayments even if conditions changed dramatically.
Will it Be More Difficult to Get a Mortgage?
On the face of it, it is hard to see how homebuyers will not be affected. Those who have never experienced a market of higher interest rates could struggle to understand the concept of the stress test and the potential lower loan amounts being offered as a result.
The current stress test used to check affordability is closer to 5%, but that extra couple of percentage points could make all the difference.
However, many lenders have already been stress testing at this new level since the BoE first introduced these measures as a recommendation. That means many borrowers will not see any change in the amount they have been advised they can borrow.
Some Borrowers Could Actually Benefit
In fact, some borrowers could even be set to benefit from the rule change. That is because the new stress tests could make it more difficult for smaller providers, who typically have higher SVRs, to compete with the mainstream lenders.
To continue lending, they may have to move into niche areas, such as shared ownership mortgages or mortgages for the self-employed. That means borrowers in these areas could receive more competitive deals.
Want to discuss what the new mortgage stress tests could mean for you? Please get in touch with our expert mortgage advisers today.