The Bank of England has announced in its Financial Stability Report that mortgage borrowers may have to prove that they could afford repayments almost twice as high as the expected monthly cost of their loan.
The changes in the report do not apply to buy-to-let lending, as those mortgages are stress tested at a lower rate than owner-occupier mortgages; the changes to tax relief and affordability tests announced by George Osborne in 2015 are more significant.
Buy-to-let investors are now required to prove that rental income will exceed 125% of the mortgage costs (or 145% for higher earners). The Bank’s current advice to lenders is to stress test at a 5.5% or a 2% increase (whichever is higher) in buy-to-let mortgage interest rates.
Banks are forgetting the lessons of the Financial Crisis
The Governor of the Bank of England, Mark Carney, has warned that increased credit card lending and consumer credit increasing 10% per year suggests that banks are ‘forgetting the lessons’ of the Financial Crisis. Whilst the economy is performing well and lending isn’t getting totally out of hand, there are still ‘pockets of risk that warrant extra vigilance’.
Though the biggest risks are short term loans and credit cards, mortgage lending standards are still under the spotlight.
As interest rates are so low and tempting borrowers to borrow more than they may be able to afford in the future, the Bank is keen that lenders do not get lulled into a false sense of security and offer increasingly risky loans.
The new rules will force lenders to apply an additional 3% on top of the interest rate at the end of the introductory offer/fixed period or the lenders’ ‘standard variable rate’ (SVR). This means some lenders may be forced to stress test at a rate of 8.75% if the SVR is 5.75%, which some currently are.
Implications of the new rules
The new rules may affect borrowers looking to secure a new mortgage as they see their affordability reduce. However, the changes won’t mean the industry will change overnight; David Hollingworth of London & Country mortgage brokers comments, “Larger lenders won’t be seeing this as a radical change…It will mean they won’t be able to consider loosening their stress test if they think competition is edging ahead. That’s what this report is all about.”
If you are concerned about how these changes could affect your ability to remortgage, we advise you speak independent financial advice as soon as possible. If you’d like to be put in touch with recommended mortgage advisers, please give us a call in the office on 01792 430100.