Lenders claim mortgage 'stress tests' are “locking people out of the market”

Leading figures in the mortgage industry have urged regulators to reduce the 'stress tests' applied to mortgage applicants because they are “locking people out of the market”.

Rules introduced in 2014 require lenders to assess whether borrowers can afford their mortgage if rates were to rise in the future. Now, lenders believe that these tests are unrealistic and are preventing borrowers from getting the mortgage that they need.

Affordability should be relaxed based on changes in the economy, says expert

In 2014, the Bank of England introduced new rules which required lenders to assess whether borrowers could still afford their mortgage if the base rate rose by 3% over the first five years of the loan. The Financial Times reports that “once lenders include their margins, stress rates typically hit 5% and above”.

Now, Peter Hill, the chairman of the Council of Mortgage Lenders (CML), says that regulators should look again at these stress tests given the change in the wider economic situation since the rules were introduced.

"The question I would ask is 'can we foresee rates over five years being at that level'? It feels quite unlikely," says Hill. "Is this stress rate realistic in the current environment - because it's locking people out of the market."

The expert said that the rules had been devised at a time when there was serious concern that the housing market was set to overheat. Annual house price rises had reached more than 20% in London at the time of the new rules, since when then the annual growth rate has fallen to around 8%.

However, the Bank of England's Financial Policy Committee (FPC) have defended the affordability tests. In November the FPC said that the 3% stress test “remains proportionate”, adding “the market-implied path for bank rate has fallen since 2014”. But the FPC judges that, given the long-term nature of mortgage contracts, it would be imprudent to rely too heavily on potentially volatile market-implied measures of future interest rates: "In addition, the current calibration of the affordability test strengthens resilience in the face of adverse income and unemployment shocks."

Borrowers 'incredulous' about punitive affordability tests

While the stress rate only applies to the first five years of a mortgage, brokers said that lenders were applying the same tests to borrowers choosing long-term fixed rates even though deals of five years or longer are officially exempt.

Mortgage broker Adrian Anderson said that borrowers were “incredulous” when told that they were being subjected to affordability tests at around 6.5% when they were taking a ten-year fixed-rate mortgage at just 2.5%.

Mr Anderson believes the stress tests have a particular impact on older borrowers. "If lenders are assessing a mortgage on a capital repayment basis until retirement age, a 50-year-old has 17 years to pay off the mortgage, stressed at 6.5%. We need some stress test but it does seem to me and many clients that it is very high."