Bank of England tightens mortgage rules: what it means for you?

Stringent new rules on mortgage affordability could force borrowers to prove that they could afford repayments almost twice as high as the expected monthly cost of their loan.

Some borrowers may now find it harder to get a mortgage, someone who made monthly payments of £766 on a 25-year £200,000 mortgage could have to prove that they could afford repayments of £1,478 at a rate of 7.5%.

The previous stress test would have checked affordability at 5%, equivalent to repayments of £1,169, so the extra amount that borrowers would have to prove they could afford would be £300 a month.

These new rules are not going to change the industry overnight, 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.

The Bank is keen that lenders do not get lulled into a false sense of security by current low interest rates and offer increasingly risky loans.

The new rules force lenders to apply an interest rate stress test – a test of a borrower’s ability to weather increases in the mortgage rate – at 3% above the rate that will apply when the introductory offer ends.

A £300 rise in provable payments sound a lot. Why are lenders relaxed about the change?

On the face of it, having to prove that much larger repayments are affordable is a significant stumbling block for many borrowers, who may be perfectly able to afford an initial interest rate of 1.5% but would struggle at 8%.

But lenders had already been stress testing at this level since 2014, when the Bank introduced it as a recommendation.

Many banks with high SVRs are already implementing stress testing at this level. But there will be exceptions to the rule and if you look hard enough you will find banks with high SVRs and lower stress testing rates that will be heavily affected.

It is now even more important to engage with a professional mortgage broker to seek advice and help on obtaining the right mortgage for you so give Homeline Mortgages a call on 01202 937444.