Since the credit crunch in 2008 and the subsequent financial crash banks have been subject to stress tests by the Government. Part of this was the Mortgage Market Review (or MMR) a comprehensive investigation of the mortgage market that came into effect in 2014. As a result, the mortgage world has toughened up. There were no more self-certified mortgages and there is a requirement for mandatory advice on all mortgages. All new mortgages, including re-mortgages, are now required to pass the mortgage stress test.
In simple terms a mortgage stress test means that lenders are now required to try to establish the affordability of the mortgage for their customers. In the past, mortgage lenders based the amount you could borrow mainly on a multiple of your income. Now a lender will look at your current income and outgoings, particularly long-term commitments like childcare, to confirm that you can afford the mortgage you are applying for at today’s interest rate. They will also try and predict the effect of interest rate rises and if you could cover your monthly mortgage payments in that event. They are not looking to prove you can just about scrape together the direct debit every month. A lender wants to know that you can do it comfortably in a broad range of personal and national economic circumstances. As part of the process you will be asked about your utility bills, insurance premiums, council tax, debts, even your housekeeping bills. All these are considered committed expenditure – costs you must meet every month without fail. Pension contributions can be seen both as a cost or as evidence of good financial planning for later in life, depending on the individual lender’s approach.
Buy to Let
Stress tests are also applied to buy to let mortgages. A buy to let mortgage is commercial in nature so it requires you to not only pass the affordability criteria for personal borrowing, but also the much more stringent stress test as well. For this reason, using an online mortgage calculator will be misleading in most cases. Some lenders will take into account your existing income, while other lenders will consider the future rental income, while also allowing for dormant months when there are no tenants in the property. Some lenders will also assess your affordability for this type of mortgage product by considering your personal tax bracket as the income is taxable.
Stress tests have been in effect informally since 2014 with more emphasis being placed on them from last year so if you have a two- or five-year fixed term mortgage or have moved since 2014 you have probably already passed on. Spot On Mortgages will be happy to look at how the mortgage stress test may affect any new application you may be planning to look at the best route to securing your mortgage. Get in touch with to discuss how we may be able to help you.