The words generous and mortgage lenders are definitely not synonymous with each other, there’s no trying to fake that. For years, lenders have favoured higher earners, repeat buyers, and borrowers with larger than life deposits. And often, first time buyers, people starting off in the working world on lower salaries, and renters who are unable to save more than 5% deposit have been penalised due to stringent lender mortgage stress test rates.
Today, mortgage lender residential and buy to let lender TSB and buy to let only lender The Mortgage Works have both announced their intention to raise their mortgage stress test rates. This means even more affordability hurdles to jump over for borrowers and even stricter borrowing limits based on income and outgoings.
What is A Mortgage Stress Test Rate?
A mortgage stress test is a test that mortgage lenders apply on all of their affordability calculators that is designed to make sure a borrower can keep up with mortgage payments. The stress test is automatically applied and will often test the borrower’s income to make sure that if rates went up significantly, they could still afford to keep the house while paying off the mortgage.
Generally, these stress test rates are between 4.5% and 5%. In an email to brokers across the country, TSB announced that they would be increasing their stress test rate to a whopping 8% for residential borrowers (excluding first time buyers) and 7% for first time buyers. TMW, the buy to let arm of Nationwide building society, have also announced that they will be increasing their stress test rate to 8.49%! As a buy to let lender, they do not lend to first time buyers.
So what does this mean for borrowers with these lenders?
If lenders are increasing their stress tests, this does not bode well unfortunately. It could possibly mean that these lenders have looked at the data and the information coming out of financial institutions like the Bank of England and expect that rates will increase significantly over the next few months.
These lenders want to make sure that the new loans that they are giving to people are affordable for people if interest rates are going to increase significantly and they don’t lose any money. If these expectation or predictions are held by other lenders too, then we could soon see lenders across the board pushing up stress tests and more and more borrowers being priced out by strict affordability criteria.
Figures released by the Daily Mail today noted that the average 2 year fixed mortgage loan rate is now 5.75% compared to 4.74% on the 23rd of September 2022 and compared to as low as 2.34% in December 2021. Where will rates go next? Will lenders follow TMW and TSB with increasing their mortgage stress rates? Only time will tell.
This morning TSB also announced that they will be temporarily pulling all of their 10-year fixed products from the market for the time being. There have been no real reasons announced by TSB for pulling the rates yet however our senior mortgage and protection advisor Jade Pinkerton weighed in today saying:
“This looks like to me like TSB are a little uncertain on their strategy and long-term pricing. It’s proof that even the lenders don’t even know what’s happening with the rates and economy at the moment. I don’t think that it’s too much of an issue though, as it only refers to TSB’s 10-year rates which are quite unusual for mortgages anyway. Most lenders currently offer 2-to-5-year fixed products and only a few offers as long as 10-years. These products aren’t usually as popular with borrowers or anywhere near as competitive as other fixed products.”
If you or anyone you know currently has a property or are thinking of buying a property soon, don’t wait. Speak with a financial professional today. Mortgage advisors are more valuable then ever and we are here to help. Give our friendly mortgage advisors a call today.