Mortgage lenders are tightening their lending criteria amid the cost of living crisis in a move that could make it harder for people to borrow as much as they could previously.
The changes are aimed at reducing the chances of accepting borrowers who may struggle to make mortgage repayments going forward, as soaring energy bills, tax rises and steeper food costs kick in. Read more in our article What does inflation mean for my money?
Santander has already announced that it’s changing the way it calculates how much it’s willing to lend over the coming months, with other major lenders such as HSBC, Barclays, Lloyds and NatWest expected to review their affordability criteria too. Affordability calculations are used to work out how much a borrower can afford to repay given their personal circumstances, and to test whether they could still meet repayments if further pressure was placed on their finances, such as interest rate rises.
Changes to Santander’s process include factoring in the impact of rising household bills and tax increases on applicants’ outgoings, and increasing its so-called “stress test” interest rate on its five-year fixed rate deals, although it has yet to confirm by how much. The stress test is designed to check that a borrower can afford to pay higher repayments if interest rates rise, and currently stands at the lender’s standard variable rate (SVR), plus 3%.
Many lenders use household spending data from the Office for National Statistics (ONS) to judge whether a mortgage applicant will be able to afford mortgage repayments after other outgoings. This data will soon include much higher energy costs, which could mean some people cannot borrow as much as they want going forwards.
Rest Less mortgage expert Teddy Cenaj said: “I believe general affordability will fall, particularly if lenders are using ONS data for household expenditure as this will increase across the board going forward. However, it may take some time for the market to adjust to this.”
Strict affordability tests were originally introduced in 2014 in the wake of the financial crisis to reduce the amount of unaffordable lending that led to the crisis. Previously, lenders based their decision on how much to lend primarily on a multiple of the borrower’s income. However, borrowers now have to complete an more extensive application process that involves detailing utility bills, and other outgoings, such as monthly childcare expenses, and debt repayments.
Meanwhile, securing a new mortgage deal when your current deal ends could become more of a challenge if lending criteria has changed since you were originally accepted. If homeowners don’t remortgage when their current mortgage deal ends, they will move onto their lender’s standard variable rate (SVR), which is usually far more expensive than their previous deal. According to data analysts Moneyfacts, the average SVR currently stands at 4.71%, compared to an average 2.86% two-year fixed mortgage rate.