Will removing the ‘stress test’ make homebuying more affordable?
We have all witnessed the rise in house prices in recent times
This affects so many people, not only those currently renting and first-time buyers, but existing homeowners seeking to move up the property ladder to allow for growing families or those looking to find a property that will suit them in old age.
Property price increases have many knock-on impacts, with the average detached house price increasing by over £60,000 during the Covid pandemic(1), the cost of upscaling to a larger home simply became unaffordable for many. According to analysis carried out by Santander, fuelled by a demand for more space at home, record numbers of applications were made to extend homes instead of moving since 2020.(2) Furthermore, the end of last year’s Stamp Duty holiday has meant that the demand for moving home this year has fallen by a third since 2021, according to an analysis of the figures released by HM Revenue & Customs.(3)
The other factor that inhibits more home ownership is being able to afford the repayments on a mortgage, especially with the interest rate rises seen this Summer in 2022. House prices are generally seen to be placing burdens, particularly on first time buyers who, even before they talk to an adviser about a mortgage, often struggle to pull together the money for a deposit.
Since 2014 lenders have had to make sure that they ‘stress test’ applicants’ ability to be comfortable paying their mortgage if and when rates rise by 3% from their starting rate. At the beginning of August, the Bank of England (BoE) decided to abolish the need for lenders to continue stress testing in this way. Other statutory requirements, such as borrowing no more than 4.5 times income remain in place alongside other considerations.
These tests were put in place after the 2007-08 financial crisis, part of a package of measures designed to prevent lending that had got out of control in the run-up to the crash.
Industry commentators as a whole believe that the Bank’s decision to remove the stress test may not be as reckless as sounds, and the market is not turning into a free-for-all, with lenders still utilising their own forms of testing, but to varying degrees according to their own perceptions of risk. The changes are expected to potentially make it slightly easier for some borrowers to get a mortgage, however the biggest constraint on new mortgages is likely to remain that of borrowers affording the initial deposit.(4)
Sources:
1 – Coombe-Whitlock, C. (2022) House prices UK: Homeowners struggle to upscale as ‘fierce’ demand for larger properties forces prices higher. Available at: https://inews.co.uk/inews-lifestyle/money/property-and-mortgages/house-prices-uk-homeowners-upscale-demand-larger-properties-price-higher-1428976(Accessed 22nd August 2022)
2 – Santander, Press Releases – Home improvement lives on in busy property market as Brits apply to extend their homes by over 1.5 million sq metres in lockdown. (2020) https://www.santander.co.uk/about-santander/media-centre/press-releases/home-improvement-lives-on-in-busy-property-market-as (Accessed 22nd August 2022)
3 – Denton, J. (2022) House prices have continued to soar but property sales are down by more than a third since last year’s stamp duty break home buying surge. Available at: https://www.thisismoney.co.uk/money/mortgageshome/article-10739119/End-stamp-duty-break-sees-property-sales-fall-third.html (Accessed 22nd August 2022)
4 – Read, S. (2022) Mortgage affordability test scrapped by Bank of England. Available at: https://www.bbc.co.uk/news/business-62353114 (Accessed 22nd August 2022)
All the information in this article is correct as of the publish date 25/08/2022. The opinions expressed in this publication are those of the authors. The information provided in this article, including text, graphics and images does not, and is not intended to, substitute advice; instead, all information, content and materials available in this article are for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information.
