At the start of August 2022 the Bank of England removed the "stress-testing" element of mortgage affordability checks, which means lenders no longer have to assess if potential borrowers would be able to afford mortgage payments if interest rates were to rise by 3% in the future. It believes the remaining affordability checks during the application process are robust enough to maintain responsible mortgage lending practices.
The decision followed a consultation process after it was estimated that around 50,000 people were being kept off the property ladder because of the stress testing requirement. The Bank of England believes it will simplify mortgage lending and help first-time buyers, movers and those looking to remortgage.
How is mortgage lending assessed now?
The previous rules were developed as part of the Mortgage Market Review 2014. They outlined that lenders needed to consider four key elements when assessing whether a mortgage was affordable.
- Existing financial commitments and debts
- Number of financial dependents
- Day-to-day living expenses and spending habits
- A stress test looking at whether the loan would still be affordable if rates were 3% higher
The change, which took effect on 1st August 2022, means the final point has been scrapped, although the other 3 parts are still included. The Bank of England also stipulated that the majority of loans available on the market need to be no higher than 4.5 times the annual income for sole or joint mortgage applicants. This should avoid a return to pre-financial crisis lending levels.
What do the changes mean for you?
The removal of stress testing is a significant change and in practice, does affect borrowing levels. Indeed, with inflation at 10.5% in the UK, the cost-of-living crisis is having more of an effect on the amount people are allowed to borrow, with lenders looking at day-to-day expenses and bills as a core part of affordability.
Households are now paying more on their energy bills and food bills inflation has seen record increases. Moreover, fuel price rises mean it now costs more than £100 to fill the average family car. This inflation will be factored into how much a lender believes you can afford to repay on mortgage debt.
In addition, with the Bank of England base rate rising, the record-low mortgage deals from before the summer of 2022 are now a thing of the past, with many mortgage rates being double - or even treble - what they were then.
To find out how much you could possibly borrow as well as how to source the best deal for your individual circumstances, you should consider using a good whole-of-market, independent mortgage broker, such as Habito*. You may also find our article "How much can I borrow on my mortgage?" helpful, as well as our mortgage best-buy table.
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