How to avoid a ‘stress test’ when you remortgage
whether they will increase rates. These brands have been accused of leaving borrowers in the lurch. Nick Morrey of John Charcol, the mortgage broker, said: “Lenders that have not announced a change run the risk of not quite looking as transparent as they could be.”
Virgin Money and Nottingham Building Society both told Telegraph Money they were still reviewing whether to increase their mortgage rates.
Remortgaging is expected to increase as customers receive larger monthly bills, but higher rates could make it harder for borrowers to switch. New rules introduced after the financial crisis of 2008 require lenders to “stress test” homeowners to ensure they can afford to pay significantly higher rates.
These rules are designed to ensure that lending standards remain high, but they can make it difficult for people to move.
A mortgage customer must show that they can afford to pay their bills at the interest rate offered by their lender, but also that they could meet the monthly payments if interest rates were 3 percentage points above the standard variable rate. So a customer who attempts to take out a two-year fix from Barclays at 1.6pc at Barclays is now required to demonstrate that they could afford to pay 8.24pc, which is the bank’s SVR of 5.24pc plus 3 percentage points. This means a customer will be able to borrow a smaller sum than before the rise.
However, there are ways for customers to get around these restrictive rules. Homeowners who take out a loan fixed for five years or more are not stress tested in the same way, making it easier to borrow larger amounts.
Analysis conducted for Telegraph Money by Anderson Harris, a mortgage broker, said a single applicant with no children and a £60,000 annual income would be able to borrow 6.5pc more by taking out a five-year fix rather than a two-year deal, as this would negate the need for a stress test. However, the higher interest rates charged on a five-year deal would have to be considered.
Mr Morrey said lenders were bound by the arbitrary 3 percentage point rule. He added: “Whether this is a good way to stress test mortgages is a moot point as it is how the Bank of England has decreed things to be.” An Aug 25 article (“No one wants to admit they were foolish”) incorrectly stated that The Hever Hotel is “in the grounds of Hever Castle”.
As the article pointed out, but we are happy to clarify, Hever Castle Ltd and the Hever Castle Estate have no connection to The Hever Hotel or its associated investment scheme.
We apologise for any confusion that may have been caused.