Santander has become the first major lender in the UK to reduce its mortgage affordability stress-test rate, easing the path for homebuyers to potentially borrow more money.
The introduction of stress-testing rules in 2015 was part of a wider approach generally seen as aiming to avoid a repeat of the global financial crisis in 2008.
In practice, what it means is that those looking at buying a house must show a capacity to afford repayments based on borrowing at a very different level to the “true” rate they would be paying at, essentially reducing the amounts they could secure for a mortgage against a property in a bid to reduce defaults.
Mortgages are repaid according to the terms of an agreed interest rate, which can differ depending on the product, the bank and the base rate set by the Bank of England. However, banks and other lenders also have a standard variable rate (SVR), which is higher – and which is the interest rate a mortgage would switch to once it reached the end of its fixed term.
However, the mortgage stress-test looks at the affordability of an additional rate on top of the SVR, effectively to ensure people would be capable of making repayments in the event the interest rate shot up and payments became unpredictably higher.
Santander has, until now, stress-tested at around one per cent beyond the SVR, but will now consider customers at around the six to seven per cent rate.
The bank has suggested the change will see many borrowers able to take out loans between £10,000 and £35,000 more than previously, depending on their earnings and other factors.
David Hollingworth, associate director at L&C Mortgages, told The Independent: “With rates rising rapidly in recent years that has put the squeeze on what borrowers qualify for, so Santander’s reaction to consider whether it can be more flexible will be welcome.
“Affordability is a key element for borrowers to determine how much they can borrow. Lenders clearly need to ensure that the mortgage will remain affordable not only now but also in the future, so use higher stress rates as part of their calculation.
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“For the right borrower, it could increase the size of mortgage they can access and so could even be the difference in whether they can meet the price of a new home or not.”
As for what comes next, Mr Hollingworth noted that other lenders could be pushed to follow Santander’s lead, given the number of potential homeowners and continually rising house prices – while interest rates, affecting mortgage repayments, are still predicted to fall later this year.
“The market is so competitive that other lenders will be watching closely and will have been encouraged by the regulator’s recent reminder on the flexibility lenders have. It would therefore be no surprise to see other big high street lenders reviewing their approach. With the Bank of England expected to apply further cuts this year, borrowers should feel more optimistic about their chances,” he said.
Changes to stress-testing have been suggested by the Financial Conduct Authority (FCA) as a way for banks to be more flexible in their approach after the government push to promote homeownership as one avenue towards the goal of economic growth.
Nikhil Rathi, FCA chief executive, nonetheless cautioned that rules and risk was a see-saw which could impact on the number of mortgage defaults, telling a House of Lords committee in January: “You cannot do both, you cannot relax the rules and have no defaults.”
Homebuyers have just a couple of days left to complete deals on their houses before potentially being hit with thousands of pounds in extra stamp duty costs. From 1 April, “nil rate” stamp duty discounts for home buyers will shrink.
First-time buyers will see their “nil rate” band reduced from £425,000 to £300,000, and home movers will see their zero rate threshold halve from £250,000 to £125,000. Stamp duty applies in England and Northern Ireland.
