In a move that demonstrates the Bank of England’s determination to prevent lenders getting too complacent about current low interest rates, strict new rules on mortgage affordability have been announced.
New tests to be applied
The rules, often referred to as “stress tests”, were set out in the Bank’s Financial Stability Report. Lenders will be forced to apply an interest rate stress test that would look at whether a borrower could still comfortably afford to make mortgage repayments at the end of an introductory period if the rate were then to rise by 3 percentage points.
When an introductory deal ends, it’s usual to move to a lender’s standard variable rate (SVR). The SVR is usually pegged to a percentage above bank base rate, and can be subject to change. SVRs can currently be as high as 5.75%, so this could mean that some lenders are forced to check whether a borrower’s finances could cope with a rate as high as 8.75%.
This could mean that someone with a 25-year mortgage of £200,000 paying around £700 a month would need to be able to prove they could still afford their mortgage if the monthly repayments doubled to £1,400.
In the same scenario, the previous stress test would have required a check at 5% which would mean the borrower being able to afford £1,100 per month. This means that under the new test they must be able to afford an additional £300 per month.
What the changes might mean in practice
However, as many lenders have been operating under strict mortgage criteria for some years now, the general view is that this may not be the stumbling block to new mortgages it might appear. The Bank has estimated that if these rules had been in operation in 2016, it would only have reduced mortgage approvals by less than 0.5%.
As a mortgage is secured against your home, it could be repossessed if you do not keep up mortgage repayments.