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!
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