Getting a mortgage is a hurdle most people have to jump to buy the home of their dreams. For some, it is a significant stumbling block. Now the bar is being raised even higher.  

Home buyers are set for stricter borrowing rules or ‘stress tests’ when they apply for a mortgage.  Banks and building societies must now check customers can keep up with their payments if interest rates rise.  

It means borrowers will only be able to qualify for a loan if they could afford bills three per cent above the lender’s standard variable rate (SVR) – typically about seven per cent – far higher than the rate they are likely to be applying for.

It is not black and white; you can pass the stress test with one lender but not with another

Giacomo Stevens, The Mortgage Hut
Mortgage rule changes
Getting a mortgage on a house

Why is this happening?

Banks and building societies can repossess your property if you don’t keep up with your repayments. It is not a good idea to take out a 2.5 per cent mortgage now if you can’t afford a five per cent interest rate further down the road.

The Bank of England announced in its latest Financial Stability Report ( that lenders should test affordability by making sure borrowers can still manage payments at three per cent above their standard variable rates.

The Bank warned there has been a growth in risky high loan to income ratios. The fear is people have been tempted to borrow by record low rates and could struggle if interest rates start to rise. Bank of England Governor Mark Carney hopes clarifying lending rules will help prevent spiralling levels of household debt and a banking crisis like that seen in 2007 in the event of another recession.

Will it be harder to get a mortgage?

The beefed-up rules will make it harder for some people to get a mortgage, say experts.

Mortgage broker London & Country said borrowers may have to prove they could afford repayments almost twice as much as the expected monthly cost of the loan. For example, someone who made a mortgage payment of £766 on a 25-year mortgage could have to show they could manage repayments at £1,475 at a rate of 7.5 per cent.

But experts say it won’t be a radical change as lenders have been stress testing since 2014 when the Bank introduced it as a recommendation.

Giacomo Stevens, senior mortgage consultant at The Mortgage Hut, said: “Banks like to put things in place, so borrowers will not see a big jump or change.”

Each bank or building society has its own standard variable rate (SVR) – some currently can be as high as six per cent, said Mr Stevens. This means some lenders could be forced to stress test as high as nine per cent.

“It is not black and white; you can pass the stress test with one lender but not with another. Each lender has their own affordability calculator to show the maximum you can borrow,” said Mr Stevens.

In its report, the Bank to England say the beefed-up rule will “promote consistency across lenders in their application of tests to assess whether new mortgage borrowers can afford repayments.” It means lenders with higher SVRs won’t be able to lower stress tests to stay competitive.

Mortgage Market Review

The tougher regulations date back to the Mortgage Market Review (MMR) in 2014 following the banking crisis, said Mr Stevens. This required affordability to be checked more stringently and banned self-certification mortgages (dubbed liar loans). Banks were also asked to assess if borrowers can still afford their repayments if interest rates rise.

All mortgages are now income-checked and expenditure is scrutinised more closely than before. Instead of just looking at income, mortgage lenders also look at outgoings to judge what would-be borrowers can realistically afford.

 “A lot changed in 2014 when the Mortgage Market Review came in,” agreed George Marley, head of research at Independent James, a London-based mortgage broker, adding. “Some banks are harsher than others.”

Mr Marley said families with children to support are particularly hard-hit by the rule changes as costs, such as food, clothes and childcare, are assessed and deducted from disposable income.

“Although banks like to lend to young families it is difficult to justify giving a mortgage to someone who doesn’t have the income to fall back on if interest rates rise.”

Mr Marley said some new borrowers had never experienced interest rates rise and didn’t think it would ever happen. But over a 30-year mortgage repayment period, rates are bound to increase, he said.

Shared ownership

Shared-ownership can be a good alternative for those unable to get a mortgage. This means the occupier buys a proportion of the property and pays rent on the remainder, typically to a housing association.

Mr Marley said: “It is a happy medium because the rent element is not stress tested, only the amount that is borrowed for the mortgage, so it is more affordable.”

Already got a mortgage?

The tougher rules are aimed at new mortgage borrowers. If you have already got a mortgage there should be minimal impact unless you apply to increase your borrowing.