The Bank of England (BoE) is consulting on the removal or revision of the stress test, which currently checks whether borrowers are able to continue making mortgage payments if their interest rate was to go up by three percentage points over the product’s reversion rate.
Adam Wells, co-founder of Lloyds Wells Mortgages, said he appreciated the current climate prompted a desire to rethink things.
He said: “With rates increasing all the time at the minute, I can see why they may be hesitant to keep things as they are.”
Colin Payne, associate director at Chapelgate Finance, said the affordability stress test should remain, but needs to be adapted to “ensure buyers can continue to realise their dream of home ownership”.
He said the approach needed to be “cautious” to keep a lid on the continual growth of house prices.
“Allowing buyers to potentially increase their levels of borrowing in a climate of rising rates and cost of living has to be carefully managed when there is a generation of people that haven’t seen a significant uptick in interest rates before,” he said.
Richard Campo, founder of Rose Capital Partners, said he welcomed a loosening or complete removal of current stress tests.
He said: “Having a reference reversionary rate of circa seven to eight per cent is unrealistic in the lifecycle of anyone getting a mortgage today. Even with rates increasing currently, very few are predicting the base rate to go above two per cent for the next five to 10 years.
“If this test was removed, you wouldn’t see lending turn into the wild west overnight. UK lenders are, and have always been, quite prudent. In fact, it was the US lenders that came into the market pre-2007 which caused a lot of issues, but having such a restrictive rule means good borrowers are ruled out.”
‘Common sense’ bespoke solutions
Brokers suggest factoring in unique circumstances beyond what is already considered when testing affordability.
Wells said he regularly spoke to first-time buyers whose rental payments were up to £300 more a month than the quoted mortgage payments.
He asked: “Would it not be possible for them to show proof of rental payment, and if that was above the current variable rate, then the mortgage is clearly affordable for them?”
Wells also suggested making prospective borrowers prove they had the money to cover mortgage costs, adding: “The same with savings in the background, if they’re able to show savings of two years mortgage payments, would that not be enough to show affordability?”
Campo echoed these sentiments, saying: “If they have maintained that outgoing and not built up debts in the process, surely that is great rationale to push beyond the current boundaries?
“Any comparable situation could be considered, which I believe is a far better test than a first-time buyer who has been at home with no experience of large outgoings.”
Campo, who worked in the mortgage industry before the 2008 financial crisis, said when he started his career mortgages were manually underwritten and his firm looked at rental expenses when deciding to lend to “good clients”.
“Without such restrictive rules in place back then, you felt a common sense approach got better outcomes, so it would be great to see a return to that,” he said.
Campo also listed borrowers he felt were being excluded by the current affordability stress test such as debt consolidation borrowers, those porting a mortgage, and high net worth clients.
For those consolidating debt, Campo said if a borrower could clear their debts and the new mortgage payment was shown to be lower than their expenses, lending outside normal income multiples should be allowed.
He said this could also be used for those porting a mortgage, as they often have fewer options. Campo said this could help mortgage prisoners if the client had obtained their mortgage before current stress tests were in place and had a larger loan than currently allowed.
“This would then remove a huge contradiction that a lender will allow a client to do a product transfer, but not move to a new property with an equal or lesser mortgage. That really is an unfair situation for some people to be stuck in,” he added.
Campo said high net worth clients were restricted by the current stress test as many held a large amount of assets but had modest or no income.
He added: “It can be close to impossible to find them a mortgage if they aren’t borrowing over £1m.”
Campo said that once a borrower met the Financial Conduct Authority’s definition of a high net worth individual – someone with £3m in net assets or £300,000 income, then private banks were “willing to help”.
However, for those wanting to borrow less than £1m “it can be very hard going”, he said.
Campo added: “In these situations, you can look at putting funds in escrow with the lender or other more creative solutions.
“This is a big gap in the current affordability regulations where again, good clients can miss out or have to pay punitive rates to get the lending they need.”
