BUYING A HOME
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 THE STRESS TESTS CAUSING LESS STRESS
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.
24 First Time Buyer October/November 2025
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