First time buyers are often frustrated by the fact that they feel they can afford a mortgage, but lenders won’t give them one. One reason for this is the mortgage stress test. Debbie Clark explains what this is, how recent changes in guidance have impacted how lenders stress test borrowers and – most importantly – what this means for first time buyers
What is a mortgage stress test?
The mortgage stress test was introduced by the Bank of England in 2014 as an extra affordability check when anyone applied for a new mortgage. It required all lenders to assess a borrower’s ability to cope with an increase in interest rates in the event of a significant economic downturn.
Even for mortgages with fixed interest rates, where the monthly cost remains the same for a number of years, when the deals end, repayments can be a lot higher. Lenders were therefore required to do a calculation, looking at their reversion rate, the default rate that borrowers are switched to if they don’t take up a product transfer or remortgage (generally the Standard Variable Rate, or SVR). Lenders needed to be confident that borrowers could afford the monthly repayments if interest rates rose 3% above the SVR.
The test was put in place to ensure that lenders were lending responsibly, and that borrowers were not taking on excessive debt that they could ultimately be unable to repay.
What has changed?
Back in early 2022 the Bank of England reviewed the methods being used to assess mortgage affordability, including the use of mortgage stress tests and decided to withdraw its mortgage stress test recommendation, with effect from August 2022. Lenders, however, remained quietly cautious about the change.
In March this year, the Financial Conduct Authority (FCA) reminded lenders to use their flexibility and noted that, given interest rates easing, current methods “may be unnecessarily restricting access” to the property market.
This reminder has impacted the market significantly, with several large lenders already adapting the way their affordability tests are applied.
What does this mean for first time buyers?
The latest analysis from property firm Savills suggests that changes in the way lenders stress test borrowers could increase first time buyer transactions by up to 24% over the next five years.
“Relaxed lending guidance will certainly change the course of travel for the housing market in the medium to long term, but there will be a strong interplay between the extent to which house prices and first time buyer transactions increase. The more increased borrowing capacity impacts prices, the less impact there will be on transactions,” comments Lucian Cook, Head of Residential Research at Savills.
The new guidance is expected to increase the number of buyers, which in turn is expected to drive up house prices, but the amount ultimately depends on how much new housing stock is delivered to meet the additional demand. Savills’ analysis suggests that the new, less stringent, stress tests could increase first time buyer transactions by 47,000 in a higher house price growth scenario, and by up to 80,000 on a lower price growth scenario (+14% to +24% increase).
The bottom line is that Loan-to-Income (LTI) figures are rising, allowing first time buyers to access properties that may previously have been out of budget. Lenders will apply their own stress tests so, as usual, it is best to get a good mortgage broker to assess the best lender for your circumstances. It is also worth remembering that lenders still need to practice responsible lending so even if you are confident that you are able to afford the repayments should interest rates rise, it is worth having a frugal few months so that your bank statements reflect this.
Case Study
Newlyweds Emma and Justin have gone from renting a one bedroom flat in Muswell Hill, north London, to owning a spacious two bedroom home in Hertfordshire. They are now starting married life having also realised the dream of owning their first home together.
A chance drive-by of Durkan Homes’ Hatfield East development put Emma and Justin one step closer to their dream of homeownership. “My mum recommended looking in Hertfordshire,” explains Justin, “and we just happened to drive past Hatfield East when visiting family in the area.” Emma adds, “We viewed our new home the same day and instantly knew it was the one,” .
The timing couldn’t have been better. After getting married in summer 2024, both Emma and Justin were keen to finish the year in their new home. “Excitingly, we completed, picked up the keys and flew off to Jamaica for our honeymoon on the same day,” says Emma. Once back from honeymoon, the couple were able to start making their mark. “We’ve already started adding our own touch to the property with a calming dark blue paint and built in wardrobes in the main bedroom,” says Emma. “We’ve also got French shutters being delivered soon, and love the classic look this will add to our home.”
Emma reflects on the difference moving out of the capital has made to their lives, “We were living in a tired, ground floor, one bedroom flat and paying far too much for it. You just get so much more for your money here. Hatfield has everything we need right on our doorstep, including shops and restaurants. There are also plenty of green spaces to explore, and it’s a bonus that our new home is only a six-minute walk from the station, with direct trains into London King’s Cross in under 35 minutes.” Perfect for Emma, who works in finance, and Justin, who works in digital PR, to be able to commute.
The couple have an eye on the future, but the current focus is on settling in. “For the time being, we’re looking forward to hosting a hot tub party in our garden and entertaining family and friends,” says Emma. “The kitchen is perfect for this and it really feels like the heart of the home. It’s also significantly bigger than other properties we looked at, so there’s room for the whole family to join us.”
BRENTFORD
Kew Bridge Rise
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READING
L&Q at Bankside Gardens
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This collection of one and two bedroom homes offers modern living surrounded by 22 acres of open space and parkland. As well as contemporary homes, the development features the Resident’s Club 51, which includes an on-site residents’ gym, private cinema and co-working space. Most homes offer a private balcony or terrace, and residents can make use of secure bicycle storage and car parking. Reading Green Park railway station is just three minutes away, with services reaching Reading station in just six minutes. Direct services on Crossrail from Reading will reach Heathrow in 38 minutes, Bond Street in under an hour and Canary Wharf in just over an hour.
lqhomes.com/banksidegardens
0333 242 2045
SHOREHAM-BY-SEA
Kingston Wharf
From £69,750 – Based on a 30% share of the full market value of £232,500
This new waterfront development of 163 one, two and three bedroom Shared Ownership apartments is situated in an exciting regeneration area along the River Adur in the historic coastal town of Shoreham-by-Sea. Homes at Kingston Wharf prioritise sustainability and have been built in line with “The Hyde Difference”, offering contemporary kitchens, integrated appliances and quality flooring at no extra cost and a high specification as standard. The development offers easy connections to Brighton, Portsmouth, Chichester and London by both road and rail. Allocated parking and electric vehicle charging points are available with selected homes, and cycle storage is provided for residents who prefer to travel on two wheels.
hydenewhomes.co.uk/development/kingston-wharf
01273 766 071
First Time Buyer is an exciting bi-monthly glossy which takes a stylish and comprehensive look at all the options available, setting them out in an entertaining and informative way, and helping potential customers navigate their way through what is often a daunting and complex process. We dispel the myths, reinforce the facts and arm the reader with the tools necessary to make their homeownership dreams a reality.
