Stress testing mortgages

Stress testing mortgages – Could You Afford Your Mortgage If Interest Rates Doubled?

Stress testing mortgages is the new buzz term in the mortgage market.  The Mortgage Market Review has introduced the term to the mainstream and is a way of checking that a borrower can still afford the mortgage if interest rates rise.  Mortgage rates can go up as well as down, and borrowers need to be prepared for this.  While higher interest rates are good news for those looking at saving, they are bad news for borrowers.  The skill of successful money management is creating a financial plan which allows your hard earned money to achieve its potential whether interest rates rise or fall.

Mortgage Rates Can And Do Rise

Over recent years interest rates have been held at historic low levels, but it has not always been that way.  Interest rates rose dramatically in the early 1970’s but by the mid 1980’s they dipped noticeably only to climb again to the early 1990’s.  Since the mid 1990’s, overall, interest rates have followed a general downward trend resulting in today’s record lows.

Nobody knows how long interest rates can remain this low but they must surely rise at some point and this is why stress testing mortgages is so important.  It makes sense to think about how to cope with a future rise in interest rates now rather than when they have already started to climb.

Make Sure You Can Cope With Rate Rises Before You Commit

Mortgages may come in varying lengths, but they are all long term commitments.  New Mortgage Market Review rules are intended to make sure that prospective buyers only take out mortgages they can afford over an extended period and stress testing mortgages will be an important part of these affordability checks.

While these new rules have to be implemented by 26th April 2014, most lenders are already following them.  In short, the goal of these rules is to oblige lenders to move away from income multipliers and to look at the affordability of the mortgage.

The new rules will force lenders into stress testing mortgages and assessing affordability by analysing an individual borrower’s overall situation.  This will include any other borrowing including day-to-day expenses, credit cards and student loans.  Lenders now have to be far more thorough in checking the accuracy of applications.

With this in mind, lenders now require much more supporting paperwork, such as bank statements, pay slips and P60’s.

In order to help progress an application quickly, buyers should ensure that they are on the electoral role and that their credit record is accurate.  It would also be advisable for buyers to do everything possible to demonstrate a stable history of financial responsibility.

Advice needed now more than ever

It’s often a good idea to get advice before taking any major financial decision.  In terms of taking out a mortgage, prospective borrowers will need to look at the overall cost.  They will need to be fully confident that they can meet repayments even if interest rates rise.

It’s also wise to look at how individual circumstances may change.  For example life’s challenges such as redundancy, unemployment, accident, illness and death should be planned for.  It’s best not to trust to luck with regard to the family home.