As of 1st August, the Bank of England will no longer require mortgage lenders to subject borrowers to a 3% affordability stress test. First introduced in 2014 in the wake of the financial crisis, this test was designed to stop mortgage holders from over-extending themselves financially.
Essentially, the stress test determines whether or not borrowers could afford to continue making mortgage repayments if their rate was to increase to 3% above their lender’s standard variable rate.
Thomas Jackson, Managing Director at Cooper Associates Mortgages, explains:
“What was perhaps a good idea in principle, is now widely regarded as both unnecessary and unrealistic. The majority of borrowers obtain fixed rate mortgages, opting to find a new deal once their term ends in order to avoid standard variable rates, which are almost always more expensive.
Additionally, most standard variable rates are currently much higher than 3%, with the average thought to be around 4.91%.”
So, could the scrapping of these tests lead to an increase in loan amounts for borrowers?
“That remains to be seen,” Thomas says. “The majority of lending is dictated by loan to income limits, which stipulate that a borrower can only obtain a loan value up to 4.5 times their income.
“However, this is a welcome change. I expect that many would have struggled to pass lenders’ checks with rising cost of living expenses being incorporated into lenders’ calculations. While I think more needs to be done to help borrowers, this change will allow lenders to be more creative with their affordability tests, according to their individual appetite for risk.”
Thomas Jackson, Managing Director of Cooper Associates Mortgages
