The Bank of England (BoE) has brought in tighter regulations for mortgage lenders, amid starker warnings about household debt in the UK. But what effect will they have on your chances of buying a home?
The new rules have been introduced stop lenders relaxing their affordability tests, but they could make it more difficult for some home buyers to get a mortgage.
Indeed, thousands of mortgages approved in 2016 could have fallen through if the regulations were active last year.
Here, we look at how the changes to stress testing could affect you and explain how you can improve your chances of getting a mortgage.
New mortgage regulations – how do they work?
If you take out a fixed-rate mortgage, you’ll have an introductory rate for a number of years (usually two, three, five or 10 years). After this period, your deal will revert to your lender’s standard variable rate (SVR).
The new regulations mean lenders will now need to test your affordability for a mortgage at three points above their SVR rate.
According to Moneyfacts, the average SVR in June was 4.59% – meaning borrowers would have their affordability tested at a rate of 7.59%.
How do standard variable rates stack up?
SVR’s are much higher than introductory rates, which is why many homeowners elect to remortgage at the end of their fixed term.
The chart below shows the current SVR’s of the 10 biggest mortgage lenders in the UK, based on figures from the Council of Mortgage Lenders.
With the average rate on a two-year fixed rate mortgage currently 2.26% (according to Moneyfacts data), the leap to a lender’s SVR can be a costly one for homeowners.
Will the changes stop me getting a mortgage?
The BoE says mortgage approvals would have dropped by 0.5% in 2016 had the new rules have been in force.
Last year, just over 800,000 mortgages were approved – so, around about 4,000 mortgage offers would have been rejected.
The good news is that many lenders already test affordability at the high levels now demanded by the BoE.
The BoE says half of the mortgages sold in the last quarter of 2016 were tested using the lender’s SVR plus 2.75 to 3.25 percentage points.
Of these, 30% of mortgages were tested at a lower rate, and 20% at a higher rate.
How can you improve your mortgage changes?
Beyond saving a bigger deposit, there are various ways you can improve your chances of getting a mortgage.
Choosing the right time to apply can make a big difference. Preparing all of the relevant paperwork, ensuring you’re on the electoral register and making the most of your credit history will stand you in good stead.