Could you pass a Mortgage Stress Test?
We all know that getting a mortgage is stressful… but did you know that part of the process is literally A STRESS TEST?
In a time when the cost of EVERYTHING is going up, knowing whether or not you can afford future increases is key.
What is a stress test?
Stress testing was introduced in 2014 and required mortgage applicants to prove they can afford increased repayments, should mortgage rates increase by 3% above the standard variable rate of their lender.
However, in a bid to encourage home ownership, stress testing was scrapped as a requirement in August 2022.
But, as we all know, mortgage rates were quite low a few years ago, but they have been on the rise for a while now – at one point we saw FOURTEEN consecutive increases on the base rate, which heavily impacted monthly mortgage repayments.
So, while stress testing is no longer a requirement, it’s still very important that lenders consider your income when looking at your mortgage application and assess affordability. This way, lenders are reassured that you’re not going to default on the loan if the repayments increase. It’s also reassuring to you, the borrower, that the lender feels that you can afford any potential increases.
Now that stress testing is no longer a formal requirement, how are lenders figuring out if you can afford any future increases? Well, this is where the loan-to-income ratio comes in.
What is Loan to Income?
Loan to income – or LTI – allows lenders to assess how much you can borrow, based on your income.
The lender still needs to make an assessment of your ability to repay your mortgage, including considering future rate fluctuations, so they do not offer you a product that would disadvantage you. Lenders are regulated by the Financial Conduct Authority (the FCA), which protects the consumer.
As a general rule of thumb, you can expect to borrow up to 4.5x your annual income if you are a solo borrower or 4.5x your joint annual income, if you are buying with a partner.
However, there is some flex in this, as you could be able to borrow up to 5.5x your income, if you are in a higher earning bracket.
Why is a stress test or loan to income check important?
The stress test was scrapped in order to encourage more home ownership, which means that without the stress test, previously rejected applicants could now quality for a mortgage.
But, given the changes in mortgage rates over the past couple of years, it should be pretty clear WHY stress testing or the loan to income check is important.
Mortgage rates can go down (and we are all hoping they will go down again in the future!), and that’s great news when you come to remortgage, as it frees up more of your income to spend on other things.
But much as they can go down… they can go up – and stay up. So it’s important to know that should they go up by time your remortgage rolls around, that you can afford that.
Mortgages are long-term loans – HUGELY long-term, going up to 35 years. That’s a LONG time and both you and the lender need to know that you can afford the highs and lows across the years – or, in most cases, DECADES.
While the government wants to encourage homeownership, lenders remain bound to FCA rules that ensure responsible lending.
How does this impact your mortgage?
So how does this testing impact your mortgage? Well, the simple answer is that it is the make or break point when it comes to approval.
If you pass stress testing, your mortgage will be approved. If you don’t, then you won’t. So it’s a pretty big thing that impacts your mortgage. But it is also a GOOD thing. Yes, if you get your mortgage rejected because you do not pass the affordability test, that’s incredibly disheartening – but it would be worse to default on the loan in the future and lose your home.
We always recommend that you work with a broker, particularly if you are a first time buyer. They will be able to advise you from the first phone call on what you need to aim for when it comes to deposit and how much you are likely to be able to borrow.
It’s then up to you to figure out if you can afford the area you’re hoping to move to. But, if you miscalculate and fail the affordability testing, your broker will be able to advise you on where you can improve to ensure it doesn’t happen again.
If you’re looking for a broker who will be with you every step of the way, book a call. We can help you find the right person for the job!
So there you go – that’s what an how affordability is tested and why it’s important for you AND the lender. Do you have any questions about the mortgage journey that you’d like us to answer? Let us know in the comments below.
