Relaxed Stress Test For Banks | Good News For Getting A Mortgage?

Let’s Talk Money and Mortgages – WIS

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Gemma:

Hi, welcome back to our channel and podcast! My name is Gemma, and here at WIS, we talk about money, mortgages, and positive money mindset.

Today, we’re exploring the Bank of England’s announcement to abandon stress test recommendations and what it means for your mortgage.

We have Ifthikar joining us again. For those who don’t know, Ifthikar is a trained accountant and mortgage advisor with over 11 years of experience and one of the founding directors here at WIS.

Q1: What is a Mortgage Stress Test?

Ifthikar:

A stress test is an evaluation that banks perform during a mortgage application to assess your ability to repay your mortgage under adverse conditions.

Key points:

• Banks use the Standard Variable Rate (SVR) as a baseline. This is the rate you pay once your deal ends, usually around 4.5–5%.
• On top of that, banks have historically added a 3% stress rate, creating a “what-if” scenario.
• Example: SVR = 5%, stress test adds 3% → evaluates affordability at 8% interest rate.
• This ensures that even if rates rise significantly, borrowers can still afford repayments.
• This is the stress test that the Bank of England is now recommending to be abandoned.

Q2: What is Changing with Stress Testing?

Ifthikar:

The additional 3% stress on the SVR is being removed.

Banks will now assess affordability using the standard variable rate only (e.g., 5%).

Implications for borrowers:

• Potential to borrow more money, as affordability calculations become slightly less strict.
• Especially helpful for borrowers whose income has not increased in recent years, while house prices have risen significantly.

Q3: How Does This Benefit the Borrower?

Ifthikar:

It may make it easier to qualify for higher mortgage amounts.

Banks will still consider inflation and household costs, so affordability is not solely based on stress test removal.

Some banks already use ONS data and household inflation figures, which can reduce the mortgage amount for borrowers.

Removing the extra stress rate can partially counteract these negative effects, helping some borrowers secure more funding.

Q4: Are There Any Remaining Restrictions?

Ifthikar:

Loan-to-income ratios may still apply, often capped around 4.5 times your income.

Some lenders may relax this slightly, but it’s too early to confirm exact changes.

Early signs indicate banks may remain cautious and not drastically increase allowable borrowing.

Q5: When Will This Change Take Effect?

Ifthikar:

The changes are expected from 1st August.

Banks typically announce their specific policies closer to the date (around July).

Borrowers should monitor updates and speak with advisors for guidance.

Q6: Any Advice for Potential Borrowers?

Ifthikar:

Do not rely solely on this announcement; start looking at properties and mortgage options now if you’re ready.

Inflation, rising interest rates, and affordability factors can still impact borrowing capacity.

Niche lenders may offer:

• Slightly higher loan-to-income ratios (up to 5.5x) for young professionals or high-potential earners.
• Special rates for careers like nurses, doctors, and accountants, reflecting future earning potential.

Always consult a mortgage advisor to explore your options.

Q7: Final Thoughts

Gemma:

The stress test removal could be positive news for borrowers, but it’s early days, and banks’ policies will vary.

If you’re considering a mortgage, it’s wise to plan ahead and speak with an advisor rather than waiting until August.

Reminder:

These points may not apply to everyone; check with a qualified advisor.

As a mortgage is secured against your home, it may be repossessed if repayments are not maintained.