Mortgage affordability checks eased – can you borrow more?

A number of mortgage lenders have introduced changes to ease the affordability testing used to determine how much you can borrow. Santander, Lloyds and HSBC are among the banks that have announced some loosening of affordability criteria within this testing to allow mortgage applicants to borrow more.

Affordability criteria was made non-compulsory in 2022, however, it still forms part of the framework that many lenders use to assess mortgage affordability. Santander, Lloyds and HSBC have all acted following communication from the Financial Conduct Authority (FCA) in March, stating "stress testing an applicant’s ability to pay higher interest rates could be unduly restricting access to otherwise affordable mortgages”, particularly in the current climate of falling mortgage interest rates.

What are mortgage affordability rules and how have they changed?

Mortgage affordability rules were formulated mainly to prevent a repeat of the 2008 financial crisis caused by excessive lending that left people unable to afford interest rate hikes and tackle the effects of a fall in property prices. The rules were removed by the FCA in 2022 but lenders have continued to restrict mortgage lending by following a degree of stress testing, which checks whether the mortgage applicant could continue to afford the mortgage payments if the interest rate were to increase in the future. Lenders would choose to stress test a rate that may be up to 3% more than the standard variable rate to test whether payments could still be met. This check is usually carried out as part of the affordability testing, which includes an assessment of your income, how much existing debt you have, your regular financial outgoings, and your creditworthiness.

What has changed?

In March this year, the FCA issued guidance, stating “Many firms currently stress test affordability by adding a margin to their current reversion rate. However, where a lender’s reversion rate does not take account of future market expectations, this can result in an unnecessarily high stress test which may restrict some consumers from getting an otherwise affordable mortgage”.

Certain lenders have taken action based on the FCA's comments, reducing rates used for stress testing or increasing income multiples allowed for some of their customers. As the FCA’s guidance and comments are not a mandatory instruction for lenders, not all have implemented easing of affordability measures and because multiple factors determine how much you can borrow on a mortgage, changes to any single criterion may not necessarily increase your borrowing ability with a lender. If you are struggling to qualify for the mortgage amount that you need, it is usually best to speak with a mortgage specialist* who can guide you to the lender that is most suited to your specific situation.

We explain how lenders assess affordability in our article “How much can I borrow on my mortgage?”. We also list lenders offering high-income multiples for mortgage borrowing and the criteria you’ll need to meet to qualify.

Which lenders have eased mortgage affordability criteria and how?

Santander

Santander was first to introduce new measures that could allow customers to borrow up to £35,000 more on a mortgage loan. It did so by reducing affordability rates so that where it would previously have stress-tested a borrower’s ability to afford the mortgage amount based on 1% above its standard variable rate (which is 6.75%) a reduction of up to 0.75% means that testing will apply at between 6% and 7%.

Lloyds Banking Group

Lloyds Banking Group, which includes Halifax, Lloyds, Bank of Scotland and BM Solutions, followed suit in April by reducing the stress test rates used to limit maximum mortgage loan values for their customers. Typical mortgage applicants - that’s a household with 2 adults and 2 dependents earning £75,000 combined with average credit commitments - can now borrow around 13% more which is an extra £38,000.

Those choosing a five-year fixed rate are to be tested against a rate of 4.5% or 0.5% above the initial mortgage interest rate, whichever is higher, while those choosing a 2-year fixed rate will be tested against 2% above the initial interest rate or 5.5% if this is greater. This is in contrast to previous testing, which was carried out at around 4% above the initial mortgage interest rate.

Nationwide

Nationwide is one of the few large lenders in the UK that offers up to 6 times income mortgages to first-time homebuyers, as long as they meet the minimum income criteria. Having increased the minimum annual income requirement for a sole applicant up to £40,000 in January this year, Nationwide reversed this and reduced it back down to £35,000 in April to help more customers qualify for its Helping Hand mortgage. It also cut rates by up 0.3% across a range of fixed and tracker-rate mortgage products this week.

HSBC / First Direct

HSBC, which owns First Direct, announced that it has relaxed its affordability calculations, which could mean that first-time buyers under certain conditions could borrow up to £39,000 more.

Atom Bank / Precise Mortgages

Atom Bank & Precise Mortgage have similarly reduced the thresholds for stress testing, meaning those with 'perfect' and 'less than perfect' credit histories could find that they can now borrow more on a mortgage than was previously possible.

April Mortgages

A fairly new lender in the UK specialising in long-term fixed-rate deals, April Mortgages introduced 7 times income lending on 10 and 15-year fixed-rate mortgages.

How to maximise the mortgage amount you can borrow?

It is vital to bear in mind that many of the improvements announced by the above lenders are subject to meeting other aspects of the affordability testing. Minimum earnings and maximum loan-to-value criteria are commonplace when enhanced borrowing is offered and rates may be less attractive when based on larger multiples of your earnings. You can compare the rates that you are quoted using our mortgage rate comparison tool, which will search over 90 lenders' deals to show you the most competitive rates or simply check our regularly updated article, "Best mortgage rates in the UK".

However, what is clear is that mortgage applicants are likely to see improved outcomes as a result of the changes. First-time buyers, thinking they may need more savings, should speak to a mortgage adviser*. New lending rules might mean they can afford a home now. Furthermore, home movers and those looking to remortgage deals might also benefit from easing affordability testing, as renegotiating deals in light of increased living costs can be daunting. Many households actively avoid changing lenders, believing they won't meet affordability criteria when reassessed, so eased testing may help to relieve this anxiety, which can often stop borrowers from seeking better mortgage deals.

The best way to check which mortgage is best for your circumstances is to speak with an independent mortgage professional who can take the time to understand your needs and use their industry knowledge to direct you to better mortgage deals. If you do not have a mortgage broker, you can source one in your local area using the online professional directory, Vouchedfor*, where you can select on the basis of their specialist services and the customer reviews they have received. Alternatively, go online free of charge to Habito*, where mortgage advisers will check over 90 mortgage lenders’ deals to find one that is right for you.

 

If a link has an * beside it this means that it is an affiliated link. If you go via the link, Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. The following link can be used if you do not wish to help Money to the Masses or take advantage of any exclusive offers - Habito, Vouchedfor