Mortgage stress test – too high for the average family?

House of Money: home mortgage stress testThe Intermediary Mortgage Lenders Association (IMLA) has appealed to government to reassess the Financial Policy Committee’s mortgage stress test for anyone wishing to climb the property ladder.

Last year’s new ‘mortgage stress test’ came into force for all aspiring home owners. Buying a new home is already one of the most stressful experiences of adult life but there is now the requirement to pass a mortgage stress test to seal the deal. Any lender has to go through this process in order to ascertain that the home buyer is able to meet the demands of mortgage repayments and the upkeep of their home, even in the face of changing interest rates, redundancy or the loss of one salary, perhaps through having a baby. Mortgage stress is currently assessed at Standard Variable Rate plus 3%, which IMLA says is more than most home buyers will realistically pay and is out of reach for many low income families.

The test has proved controversial for some first time buyers as it can decrease purchasing power by as much as 20%. It can also make it more difficult for people who already own their property but need to refinance or renew their mortgage.

IMLA is also concerned about what will happen after the Help to Buy scheme is phased out, with its total removal planned for 2023. This could mean that even fewer people will be able to become homeowners and that shared ownership will be the only other viable solution. The organisation’s executive director, Kate Davies said:

“IMLA is calling on the government to put real focus and resources into solving the issues plaguing our current housing market. We need the government to work with the industry to decide what happens after Help to Buy ends. Affordability and supply need to be addressed. We need creative ways to get young people onto the ladder without having to rely on the Bank of Mum and Dad. We need to champion the crucial role the buy-to-let (private rental) sector plays in Britain’s housing market.”

The government has recently discussed proposed changes to the shared ownership scheme which would see consumers being allowed to staircase from as little as 1%. IMLA have asked for more clarification on this in terms of practicality, cost effectiveness and whether demand can be met.

It is without doubt that home buyers are finding it increasingly difficult to step onto the property ladder and shared ownership properties are currently in short supply. For the scheme to work, eligible properties need to be offered to the housing market in greater numbers with a clear, consistent plan.

IMLA has requested a review on stamp duty which would pave the way to reducing the barriers associated with home ownership. The proposals are exciting for many who dream of being home owners, but IMLA has warned that any changes should be carefully managed, in order not to raise hopes ‘unduly’.

If you are able to start looking for a property, how can you prepare yourself for the affordability test?

One of the first things to do is make a comprehensive (and honest) list of all your income and outgoings. 

Lenders will use a few basic metrics to determine your eligibility. What is considered an acceptable level of debt to income ratio varies between lenders but the lower the ratio the better. If you can’t increase your income, you could try to pay off any outstanding loans or credit cards.

If your debt to income ratio is 20% to 30% you are considered low risk and have a very good chance of your mortgage application being accepted and may even be able to access more favourable rates. Higher than this and you will have to shop around, although a good application would make a higher debt to income ratio more acceptable to lenders.

There are often hoops to jump through, but you will sometimes find that criteria differ from lender to lender, so it is worth shopping around. However you should remember that any application could affect your credit score on future applications.

There are schemes offering mortgage guarantors if you find that you are just short of the threshold. Check out comparison websites for different types of mortgage and, if you do find yourself passing the stress test (in more ways then one!), always ensure your home is safe by using a chartered surveyor when you purchase a property.

Back to January 2020 Newsletter