The Bank of England’s decision to scrap its mortgage stress test has been branded “poor timing” as the Bank steadily increases the base rate.
Consumes have been urged to conduct their own stress tests when they apply for a mortgage, ensuring they will be able to keep paying their loan if and when their payments go up.
Until the start of the month Bank rules meant lenders had to check consumers could afford their mortgage at the revert-to-rate (typically the standard variable rate) plus 3%, unless the loan was fixed for five years or more.
Now the Financial Conduct Authority’s stress test of 1% is all that remains.
Adam Male, chief revenue officer at estate agent Mashroom, said: “Currently, we’re seeing huge strains on household spending on energy and base rate rises will inevitably affect mortgage repayments for those who are remortgaging or applying for one. It seems like poor timing to scrap a measure that was brought in specifically for the events we’re seeing now, to test whether households could afford repayments in the event of interest rate rises and changes to the cost of living.
“Even though affordability tests have been scrapped, it’s still worth potential homebuyers doing their sums to ensure that they can afford the mortgage repayments, both in the short term and in the future, as well as factoring in the cost of living outgoings.
“Consumers should be looking at their household income and monthly outgoings to determine that mortgage repayments can be factored in comfortably. Seeing your outgoings in one place could identify ways of saving money such as making sure you’re on the correct energy and utility tariffs, as well as helping to cut back on any unnecessary spending.
“Make sure you’re aware of any future increases in the cost of living, such as the issues surrounding energy price caps. This is a major concern for many households, therefore buyers need to make sure that they can factor in any increases in energy bills, on top of mortgage repayments before they take out a loan to buy a property.
“Finally, it’s worth conducting your own affordability test, replicating the recently scrapped process by increasing the interest rate by 3% on the standard rate of your mortgage repayment, to make sure you can afford the costs in the event of further increases in interest rates.”
While the Bank’s move was controversial, Male added that he doubts we’ll see a huge influx of prospective buyers applying for mortgages.
While the stress test was scrapped, the Bank of England’s ‘loan-to-income flow limit’ remains.
This limits the number of mortgages lenders can issue with a loan-to-income ratio above 4.5 to 15% of new lending.
Paul Johnson, head of mortgages at wealth management firm St. James’s Place, said: “It is unlikely to have a big impact on lenders affordability calculations with the increase in utility bills being factored in.
“A bigger impact would have been seen if the FCA had changed the loan to income (LTI) rule.”