Lenders apply a ‘stress test’ to try to ensure that borrowers will comfortably be able to afford their mortgage throughout the whole term, rather than just at the time of application.
It’s important to understand why it was introduced and who it is meant to protect.
After the 2008 ‘Credit Crunch’ Governments all over the world were left supporting banks in financial difficulty caused in the main by irresponsible lending to borrowers on low-interest rates, who were later found to be unable to pay their mortgages when interest rates increased
Prior to 2008, it was not unusual for UK mortgage lenders to lend 100% of the purchase price on the property and sometimes even more 100%, with extra money being lent for consumer goods, moving costs, etc. This was all reliant on the expectation that UK the housing market would keep rising in value! Unfortunately, it didn’t!
Post 2008 the UK Government laid down new regulations requiring mortgage lenders to curb their lending practices, hence the mortgage stress test was introduced!
Although some lenders have started to offer 100% mortgages again with very strict criteria, most mortgage lenders will require a deposit. No mortgage can be granted until the stress test has been passed.
So how does it work? A Stress Test will look at whether or not a borrower will still be able to meet their monthly repayments plus all other necessary budgeted expenditure if mortgage rates were to increase to a specific amount - usually around 8%. This is particularly important where when mortgage interest rates are low.
Of course the stress test can never be totally accurate. Although some of the figures used are based specifically on the applicant, (i.e. credit commitments, childcare, etc) a lot of the data comes from The Office for National Statistics (ONS). For example, ONS will be able to provide data on the average family of 4, based on their probable shopping bill, leisure spending, etc. Of course, these figures may be very different from family to family. Unfortunately, the stress test is based on the average family spending and not the actual family spending going forward.
Your Mortgage Advisor will be able to arrange a “Decision in Principle” to see if you fit the lender's stress test. This is an excellent place to start!
Download our Free First Time Buyers Guide
Recent posts
Budgeting over the Christmas Period
24 days ago
The most wonderful time of the year can easily turn into the most expensive time of the year. Watching the pennies doesn’t mean that the Christmas festivities have to stop, following a few budgeting tips can mean you still have a special Christmas and don’t go into the new year in debt.
Preparing your home to sell in winter
28 days ago
December is usually a less desirable time to buy as many people don’t want to move over the holidays. However, prospective buyers do start to look at this time. Selling your home in winter may require a bit of extra attention to showcase your property at its best.
We look at why mortgage rates increased following the Bank of England's choice to reduce the bank rate, and should you fix now?
UK 2024 Autumn Budget: Housing
30 Oct 2024
On 30th October 2024 the Chancellor, Rachel Reeves delivered the Autumn budget which we had previously been warned would be “difficult”. Below we have summarised the main housing points.
Talking about money with kids
23 Oct 2024
In an increasingly cashless society, money is an intangible concept for children to grasp. In the days of coins and notes, kids could see money as something physical you require to purchase goods and services.
In order to help teach your children about money, we have listed some tips below;
Labour Autumn Budget Predictions: Housing
18 Oct 2024
The UK’s chancellor, Rachel Reeves will deliver the Labour government’s autumn budget at the end of the month, we take a look at what could be announced in relation to housing.
Recent research from Halifax has revealed the most sought-after locations for first time buyers in Britain.
The data which was taken from the Halifax House Price Index looked at areas outside of London where those looking to purchase their first property were buying. Despite high property prices and increased rates, these first time buyer hotspots have remained popular.
How can I look after my mental health?
7 Oct 2024
Taking care of your mental health means looking after your emotional, psychological, and social wellbeing. There are several ways we can practice self-care that will help to improve our physical and mental health. This can help to reduce our risk of illness, manage stress, and boost our energy levels!
More information
Trusted by
