Stress Test Guidelines to be Applied for New Mortgage Applicants

Late last year we reported on the warnings that had been given for those who were looking to apply for a new mortgage. With interest rates at a historic low, many are concerned that people will apply for a mortgage now and not be able to afford their repayments once rates start to rise. The rules were actually set out way back in October 2012, and the regulations are not set to come into force until April this year a full 18 months after they were initiated. However, some lenders have already put the rules into play. It seems they are keen to avoid another catastrophe if (and no doubt when) interest rates do start to increase. Interest rates at an all time low for 5 years Nearly five years ago the Bank of England dropped the base rate upon which all interest rates are calculated to 0.5% – the lowest it has ever been. Common sense tells us the rate will not stay this low for ever, hence why so many lenders are keen to ensure they lend based on what interest rates could be in the future. To lend based only on todays rate would store up a raft of potential problems for the months and years to come. Affordability of 7% interest rates The jump in payments that would be required if interest rates were to go this high would be significant. According to the latest figures, a standard variable rate mortgage for £100,000 offering 4.36% at present would incur monthly payments of £548. This would increase by £159 every month if the interest rates were to go up to 7%. Bigger monthly increases would be seen on other mortgages as well. For example, a two year fixed deal offering an interest rate of 2.45% at present would incur monthly payments of £446. The monthly increase if interest rates rose to 7% would shoot up by £261. This is an increase of more than 50% compared to the current rate given above. The message here is clear. People should not be borrowing to the maximum of what they can currently afford. Instead they should have a significant cushion in place for when interest rates do eventually start to rise. Since most mortgages are taken out over 20 to 25 years, it is a virtual certainty that this will eventually happen and perhaps sooner than anyone might think. While those looking to find an affordable mortgage may think these guidelines are another barrier to buying a home, they are realistically necessary. Many people got into trouble with their mortgage a few years back when the recession began. Clearly no one wants the same thing to happen again now. Finally those who opt for an interest only mortgage must prove they have measures in place to repay the loan at the end of the term. They must not simply rely on the value of their home increasing over the years.

Published on 28 March 2020

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