Lenders will have to adopt a more uniform approach to mortgage stress tests, following a clarification of the rules by the Bank of England’s Financial Policy Committee (FPC).
The FPC is there to keep any risks that could threaten the resilience of the UK financial system in check, including making sure that lenders will be able to cope if borrowers can’t keep up with repayments.
It first recommended affordability stress testing in 2014, so that lenders could be certain borrowers would be able to afford the cost of their mortgage were interest rates to rise. The FPC originally suggested that lenders should focus on whether borrowers could cope with a 3% increase in the Bank Rate during the first five years.
However, lenders interpreted this in a range of different ways, not always feeding the increase through to their reversion rates. The reversion rate is the rate to which your mortgage will revert at the end of any special deal or fixed rate period, which means it is usually the lender’s Standard Variable Rate (SVR).
As a result, some lenders imposed more relaxed stress tests than others or took a more flexible approach when assessing borrowers’ outgoings.
What’s changing?To ensure greater consistency across the market, in its latest twice-yearly Financial Stability Report, the FPC has amended its recommendation so that the stress test must relate to a three-percentage point increase in the lender’s current reversion rate. If the mortgage contract does not specify a reversion rate, the stress test must be three percentage points higher than the product rate at origination.
This is not expected to result in any radical changes for those applying for a mortgage, but for some lenders who had operated a lower stress rate it could mean a slight reduction in the amount you can borrow.
What about buy-to-let rules?The report also confirmed that there will be no further changes to buy-to-let affordability rules, given recent changes already introduced by the Prudential Regulation Authority (PRA).
Since January, lenders have had to take the borrower’s income and personal circumstances into account as well as rental income when assessing buy-to-let mortgage applications.
Lenders must also apply a ‘stress test’ of a minimum interest rate of 5.5% for the first five years of the loan.
From the end of September, lenders will need to examine the whole portfolio when underwriting mortgages for landlords who own four or more mortgaged buy-to-let properties, rather than assessing each property on a standalone basis.