City regulator the Financial Conduct Authority is calling on mortgage lenders to get tougher with potential borrowers to ensure they will still be able to afford repayments if interest rates start to rise.
The new guidelines, based on the Mortgage Market Review, are already being used by the biggest lenders and will involve “stress tests” to see whether buyers can afford potentially higher monthly payments and will also include more strenuous tests on the borrower’s finances and spending.
Though rates have been at a historically low rate of 0.5% since 2009, they are expected to rise within the next couple of years and the “stress tests” involve interest rates at 7% in the next five years to see if a borrower’s budget can cope with the rise. It will represent quite a change from the times when a mortgage was granted at four times a person’s salary with relatively few checks on their finances.
Now, under the FCA’s new guidelines, a lender will have to look at the affordability of a mortgage over the five years after a loan is made. The market currently expects interest rates to rise to 3% in five years.
