From 1 August 2022, banks and building societies will no longer be required to “stress-test” a borrower’s finances with the mortgage market affordability test when working out how much to lend. The rules were originally introduced after the financial crash of 2007-2008.
First-time buyers may benefit from the Bank of England’s announcement, but experts do not expect it to lead to a mortgage boom.
What is the mortgage stress test?
The mortgage affordability “stress test” meant checking that a borrower could still afford their loan at the end of any short-term special offer period if interest rates went up. Lenders worked this out using the “revert to” rate – the standard variable rate or tracker rate that borrowers would move on to, plus three percentage points.
For example, if a borrower took out a two-year fixed-rate mortgage at 2.5% with a “revert to” rate of 4.0%, they would need to demonstrate that they could afford the mortgage at 7% (4%+3%).
Who will scrapping the stress tests help?
Scrapping the test may help would-be buyers who have been refused mortgages that have lower repayments than the sum they pay in rent each month. A consultation by the Bank of England found that in order to qualify for home loans people were taking mortgages over longer terms, or on longer-term fixed rates, which meant paying more overall.
Are restrictions on lending still in place?
Banks and building societies are still restricted on how much lending they can do above 4.5 times salary – this stops them from agreeing lots of large mortgages and it is this that has been having more of an impact on first-time buyers than the stress tests.
The regulator, The Financial Conduct Authority, also still compels mortgage providers to consider affordability prior to lending, as set out in the FCA Handbook (Mortgage Conduct of Business 11.6).
Under the current rules, lenders are allowed to offer five-year fixed-rate mortgages without applying the Bank of England’s stress tests, but most lenders applied them anyway, which has affected some borrowers’ chances of getting a mortgage. It is thought likely that they will drop these discretionary tests when the rules change.
What’s happening to buy-to-let stress tests?
Stress testing rules are slightly different for property investors and landlords purchasing properties using buy-to-let mortgages.
Lenders will often stress-test mortgage applications against mortgage rates of 5% or 5.5%, in order to ensure landlords could afford repayments, despite the fact that average mortgage rates have been much lower than this for several years.
What’s the likely impact on the real estate market?
Mortgage rates have been rising in recent weeks. These increases combined with the rising cost of living, mean many experts are not expecting the rule change to have much impact in the short term. However, as liquidity in the property market tightens measures such as easing restrictions and facilitating purchase funding may be welcome news for developers.
How 3CS can help
For legal help and advice with any commercial or residential property matter please get in touch with your usual 3CS contact.
