Average fixed mortgage rates are around 5 per cent; but responsible lending rules mean, in some cases, borrowers being tested on whether they could continue to meet their mortgage payments if rates entered double digits.
Unless a rate is fixed for at least five years, generally lenders are required by the Financial Conduct Authority to test whether borrowers could afford to pay at least 1 per cent above the standard variable rate.
At Santander for example, tracker, two and three-year products are stressed at 1 per cent above the lender’s standard variable rate of 7.5 per cent, equating to a stress rate of 8.5 per cent. Five-year fixed rate products are stressed at a concessionary rate of the basic SVR.
Rates collated by broker L&C, following the Bank of England Monetary Policy Committee’s March meeting in which the base rate was held at 5.25 per cent, show that SVRs ranged from 6.2 per cent up to 9.73 per cent.
At the top end, this means a stress rate of at least 10 per cent in some cases under the FCA’s rules.
In many cases, high SVRs have affected the maximum amount that clients can borrow, says Ray Boulger, senior mortgage technical manager at John Charcol, a mortgage broker.
“When bank rate was sub 1 per cent and stress rates were well below today’s levels, in most cases the maximum income multiple dictated the maximum loan, not the affordability test.
“With today’s stress rates there are more cases where the affordability test is the restricting factor, especially for clients with above average other financial commitments.”
Yorkshire Building Society’s director of mortgages, Ben Merritt, likewise says the rule of applying a stress rate of 1 per cent above reversionary rate is currently a “binding constraint”.
He explains that, if the average SVR is between 9 and 10 per cent – and the FCA's Mortgages and Home Finance: Conduct of Business Sourcebook states that you have to stress test at 1 per cent above that reversionary rate, that means in some instances institutions are testing affordability at above 9 to 10 per cent.
Putting this into context, this is happening when interest rates are actually only about between 5 and 6 per cent.
"Having to stress test at a materially higher level than what customers are actually experiencing,” he says.
“And then secondly, MCOB rules state that even if you think that interest rates are going to fall over that five-year horizon, which is exactly what the market is expecting, you still have to stress with a 1 per cent increase to your reversionary rate.”
Lenders are required by the FCA’s rules to assume that rates will rise by at least 1 per cent during the first five years, even if they believe that rates are likely to fall, or rise by less than 1 per cent.
Merritt goes on to describe a “disconnect” between expectations that swap rates will reduce and bank rates will fall over the medium term; and a presently high bank rate influencing reversionary rates, meaning lenders are having to apply a stress rate they do not think borrowers will actually incur.
