Wednesday 17 October 2018

Mortgage lenders forced to tighten up their affordability criteria in 2018 – what it means for me

Author: Andrew Page

For the past ten years, Bank of England interest rates have been at historic lows. As a result, lenders have been offering great deals on their loans and mortgages have been incredibly affordable. This has been great for homeowners, with many enjoying low monthly repayments and competitive long-term deals.

Things however, may well be about to change. The Bank of England recently raised its interest rates, forcing mortgage repayments up for the first time in a decade. With rates set to rise further in the coming years, the Bank of England has introduced new stress tests that lenders must follow. Designed to help ensure borrowers can afford their repayments, this tough new affordability criteria is already impacting on buyers across the country.


The need for tough affordability checks

The Bank of England decided to bring in these new affordability checks because it didn’t want either borrowers or lenders to become complacent about low interest rates. Over the last few months, interest rates have gone from 0.25% to 0.5% and then from 0.5% to 0.75%, the highest level since March 2009. In the next few years, it’s likely that interest rates will rise even further, making mortgage, and loan repayments more expensive for everyone.

The affordability checks introduced by the Bank of England are designed to ensure that homeowners will be able to make their monthly repayments when interest rates go up. As Moneywise online says:

“Banks and building societies will now be required to check that a borrower can pay back their loan both at today’s rate, and also if the lender’s standard variable rate (SVR) was to be 3% higher than its current level.”


How new affordability checks could impact you

If you’re thinking about buying a property, or are currently in the process of buying a new home, you’ll need to prove you have the financial resources to cope if interest rates increased by 3%. If you’re currently stretching yourselves to afford a mortgage, this could mean your loan application is declined.

If this happens to you, you may need to reconsider the size of loan you’re applying for. If you borrow less money, your repayments will be smaller and easier to manage. However, this may mean you’re unable to afford the home of your dreams.

Alternatively, you could look at ways to shore up your finances. Talk to your boss about including overtime or bonuses in your basic pay packet and cut back on unnecessary expenses like gym memberships, TV subscriptions, and costly cars. The more you can reduce your outgoings and boost your incomings, the more likely you’ll be to pass the affordability checks.

If you’d like more advice on applying for a mortgage, get in touch with one of the members of our expert team today.

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Written by: Andrew Page