After 8 years, the Bank of England has scrapped the stress test for mortgages in England and Wales.
Introduced by the Bank of England in 2014, the mortgage stress test required mortgage lenders to check that potential clients could afford to continue to pay the mortgage debt should interest rates rise.
As of August 1st 2022, however, this mandatory requirement for potential borrowers to prove that they can afford to keep up with their payments if the interest rates rise by up to 3%, has been scrapped.
What does this mean for those who want to take out a mortgage?
The scrapping of this test means that borrowers may be able to take out larger loans, helping those who are struggling to get onto the property ladder. This includes the self-employed who don’t have the required accounts history, or those who have previously just rented and are looking to purchase their first home.
It’s not a completely free ticket to getting a mortgage, though, as there are still limits on the size of the loan you can have based on your income. Mortgage lenders are still businesses and are not keen to make risky loans.
What was the mortgage stress test?
The affordability stress test was implemented in 2014 to make sure that the 2008 financial crisis could not happen again.
The 2008 crisis was a result of banks lending more money than borrowers could afford to repay, leading to a housing market crash.
The affordability stress test was designed to prevent people from getting loans that they could not viably pay back. The idea was to calculate borrowers’ ability to meet monthly payments at the current interest rate, and to ensure that should rates go up, borrowers would still be able to continue with their payments.
The success of the affordability stress test
While this was a good security blanket for the mortgage lenders and banks, it became an issue for potential buyers. If you could afford an inflated monthly rental payment, why would you be unable to afford a lower mortgage repayment?
And yet renters were being rejected by mortgage providers as they had failed the mortgage stress test.
Why has affordability testing changed?
The Bank of England decided to cease making the test a requirement from 1st August 2022. This is mainly to encourage homeownership, an aspiration that has taken a battering with house prices increasing dramatically over the last few years.
Even though the Bank of England has removed the mandatory stress test, there are still plenty of limitations to the amount of money that you are allowed to borrow within the ‘loan-to-income’ framework.
This rule states that you are not able to borrow more than 4.5 times your annual income, so while getting rid of the stress test helps a lot, there isn’t a completely uncapped limit to how much you are able to borrow.
Was scrapping the stress test a good idea?
Overall, the new changes to how mortgages are being accepted come as a welcome shift to first-time buyers. However, there is still cause for concern with the potential for people to bite off more than they can chew with their mortgage rate – particularly as interest rates are beginning to rise for the first time in decades.
Even though this change has been implemented, it does not mean that lenders will change the way that they offer mortgages straight away. We expect a gradual transition in how mortgage lenders operate over the next few years.
Where to start when buying your new home
Find your conveyancing solicitors early in your property search so you are ready to go when you have found your ideal home.