Rising mortgage rates over the past year coupled with the cost of living crisis have made it harder for people to borrow as much as they could previously.
Some lenders have also tightened up their affordability criteria to reduce the chances of accepting borrowers who may struggle to make mortgage repayments going forward, with steep energy bills and food costs eating up a significant proportion of our monthly incomes. Read more about this in our article What does inflation mean for my money?
For example, Santander changed the way it calculates how much it’s willing to lend in the wake of September’s mini-Budget, which threw the mortgage market into turmoil. Other major lenders such as HSBC, Barclays, Lloyds and NatWest have also amended their affordability criteria too. Affordability calculations are used to work out how much a borrower can afford to repay given their personal circumstances, and to test whether they could still meet repayments if greater pressure was placed on their finances, such as further interest rate rises.
Changes to Santander’s process included factoring in the impact of rising household bills and tax increases on applicants’ outgoings. Fortunately, though, the lender has relaxed its so-called “stress test” interest rate since the mortgage market stabilised. The stress test is designed to check that a borrower can afford to pay higher repayments if interest rates rise.
Many lenders use household spending data from the Office for National Statistics (ONS) to judge whether a mortgage applicant will be able to afford mortgage repayments after other outgoings. This data includes much higher energy costs, which could mean some people cannot borrow as much as they want going forwards.
Strict affordability tests were originally introduced in 2014 in the wake of the financial crisis to reduce the amount of unaffordable lending that led to the crisis. Previously, lenders based their decision on how much to lend primarily on a multiple of the borrower’s income. However, borrowers now have to complete an more extensive application process that involves detailing utility bills, and other outgoings, such as monthly childcare expenses, and debt repayments.
Meanwhile, securing a new mortgage deal when your current deal ends could become more of a challenge if lending criteria has changed since you were originally accepted. Rising mortgage costs affect affordability too, and borrowers may find they cannot borrow as much as they’d like. If homeowners don’t remortgage when their current mortgage deal ends, they will move onto their lender’s standard variable rate (SVR), which is usually much more expensive than their previous deal. According to financial website Moneyfacts.co.uk, the average SVR is currently 7.85% – pretty steep when you consider that the Bank of England base rate is 5.25% and that the current best two-year fixed rates are around 5.86%.
Can I still get a mortgage?
Making sure you’re on the best mortgage deal possible can make a big difference to your outgoings, but the amount you can borrow and the rate you get will depend on your personal circumstances. Read more in our article Five good reasons to remortgage right now.
Rest Less mortgages expert Teddy Cenaj says: “Rates have stabilised for now, but it’s a good idea for anyone who’s approaching the end of their fixed rate or on a variable rate to consider switching.”
If you’re looking to remortgage, most lenders allow you to secure your next deal three to six months before your current deal ends, so you can move straight onto your new rate when your deal ends.
Rachel Springall, from Moneyfacts.co.uk, says: “It’s imperative for consumers to assess their current deal to see if they can switch to save some cash on their monthly mortgage payments. The desire to fix for longer may well be in the mindset of borrowers who are conscious that rates are expected to climb even further and there are even 10-year fixed mortgages to take into consideration.
“Mortgages typically carry a product fee – which can be payable upfront or on completion. Borrowers would also need to consider valuation fees and legal fees that are separate. These can end up becoming a burden if the wrong mortgage product has been chosen. Most of the best deals which provide an overall cost-effective package – such as free valuation and free legal fees, usually carry a product fee. With this in mind, its vital borrowers shop around to compare deals based on the true cost of the package as the lowest rate offer may not be the most suitable for them.”
Bear in mind that if you’re looking to extend your mortgage term into retirement, lenders’ affordability assessments will consider your post-retirement income, which is likely to be lower than your income while you’re working. However, there are a growing number of mortgage options on the market for those in their 50s, 60s and beyond, such as retirement interest-only mortgages. Find out more in our articles Mortgages if you’re over 50: what you need to know and How retirement interest-only mortgages work. Another option may be a lifetime mortgage, where both the interest and capital are repaid when you die or move into long-term care. You can find out more about lifetime mortgages in our guide Lifetime mortgages explained.
If you’re ready to start comparing mortgages, this mortgage comparison tool enables you to compare more than 15,000 mortgages from over 90 different lenders in minutes.
If you are unsure about anything it can be good to speak to a mortgage broker or advisor to make sure you find the best deal for you based on your individual circumstances. Find out more in our article Should I get advice on my mortgage?
Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for somewhere to start, you can speak to a Rest Less Mortgages advisor and get high quality advice on residential, retirement interest-only, equity release and buy-to-let mortgages.