Nigel Glossop of Alexander James Mortgage Services comments on how the Mortgage Market Review’s stress tests are helping to prepare buyers for their future.
With mortgage rates now increasing, both current and prospective homebuyers need to be aware of the increase in their mortgage repayments for when interest rates eventually rise.
The Mortgage Market Review (MMR) was officially introduced by the Financial Conduct Authority (FCA) in April, and was brought in to allow lenders to determine a borrower’s affordability if such a time was to arise.
Under the MMR rules, lenders must now check that you can afford your repayments – both now and in the future, and they do this through processes such as mortgage stress tests.
What is a mortgage stress test?
With a base rate rise inevitable, the FCA has stated that borrowers must not receive a loan if a bigger mortgage repayment could ‘break’ their finances. You will be extensively checked, with your day-to-day finances and spending coming under intense investigation.
With the new rules, lenders will need to know everything about your finances, from how much you earn to how much you spend on food and utility bills every month.
Research carried about by Experian this month revealed that homebuyers are underestimating what their mortgage repayments could be by as much as £650 if interest rates were to rise.
Whilst this may sound like a panicking statistic, this is one of the main factors why the MMR has been introduced to the market.
As well as ensuring that a return to irresponsible lending that took place in the run-up to the credit crisis is avoided, the MMR aims to protect borrowers from falling behind in their repayments, which is why doing a check now, will prepare you in good time for when the rates rise.
When the Bank of England’s Monetary Policy Committee votes to increase the base rate, expectations are that it will be increased in a controlled manner until it reaches between 3-6 per cent to minimise the risk exposure level.
If a homebuyer was to purchase a £235,000 property, and had a combined average household income of £50,674, research by Experian shows that they are claiming they can afford an average mortgage repayment of £780 per month.
However, if rates were to indeed increase to 5.5 per cent at the end of a typical two-year fixed deal, the homebuyer could find themselves paying around £1,440 per month.
As the economy continues to improve, interest rates are inevitably going to rise. This is why it is better that the MMR is letting borrowers know now how much they can afford, rather than a year from now, when it is too late.
Whilst the MMR continues to look to the future, so should you. Regardless of what measures are taken by the Bank of England and Government, there is always going to be a risk factor when taking out a mortgage, which is why considering taking out income protection insurance and seeking professional advice should be a serious consideration.
Your home may be repossessed if you do not keep up repayments on your mortgage.
There will be a fee for mortgage advice. The actual amount you pay will depend upon your circumstances. The fee is up to 1% but a typical fee is 0.3% of the amount borrowed.
Correct at time of publication. The views and opinions expressed herein are those of the individual contributor and do not necessarily reflect those of the Chancellors Group of Estate Agents Ltd or its subsidiaries. References to legislation, best practice and other matters with legal implications such as fees, rules and processes are included for information and editorial purposes only and are not authoritative, nor should they be interpreted as advice. When in doubt you should only take advice from an industry professional or solicitor where appropriate. E&OE.
