The Bank of England has confirmed that it has ditched its mortgage stress test from August, despite six recent interest rate rises and a living standards squeeze. So, what does this mean for you and what sort of mortgage should you secure?
In June, the Bank’s Monetary Policy Committee announced it would withdraw its’ recommendation for lenders to apply a Mortgage Affordability Test – a check to see whether borrowers could still afford to repay their mortgage if interest rates rose to 3%. This measure was originally introduced after the 2009 financial crisis as a way to ensure lenders offered loans that customers would still be able to afford in the event of spiralling costs.
As of August, lenders have more discretion on how they test affordability, with checks depending on your individual circumstances such as income and credit history. This loosening of rules may mean some customers could borrow slightly more and could help some who failed on affordability under the previous tests.
There’s no doubt that picking a mortgage is a difficult decision. Many home buyers are getting in touch with our mortgage team asking whether they should get a 2 or 5-year fixed rate mortgage at this current time – as they’re wanting to lock in a good deal before rates increase again. A mortgage is a huge financial commitment, so it’s important to get it right. This is why we would always recommend that you speak to a member of our mortgage team as they have the skills and experience to guide you through the process. The right mortgage deal will vary person to person as it often depends on your specific needs.
As the cost of living rises, ensuring you find the cheapest deal might be a big part of cutting down your monthly costs. Let’s take a look at some things to consider…
What’s happening with the Bank of England base rate?
It’s not exactly welcome news to learn that the Bank of England has raised interest rates to their highest level in 13 years. But it’s also important to keep things in perspective – interest rates have been at a historic low recently, ranging between 0.10% to 1.25%. Now, it’s up to 1.75%*. There is still very cheap lending on offer, compared to what homeowners were paying just a decade or two ago. Historically the norm was around the 5% mark so this might be something you’ll want to factor into your mortgage decision.
What’s the difference between 2-year and 5-year fixed rates?
Typically, 2-year fixed rate mortgage deals often have the lowest interest rate for that 2-year period, but you do pay a fee when you agree to a new mortgage. Once that 2-year period is up, your mortgage reverts back to your lender’s standard variable rate or you can pay another fee to agree to another fixed rate mortgage. Again, this will add to your costs.
A 5-year fixed-rate mortgage typically comes with a higher mortgage interest rate initially, but it’s fixed for a longer period of time. This gives you a little peace of mind as you know exactly how much you’ll be paying during that five year period.
How long should I lock in a fixed rate deal?
It’s good to ask yourself whether you want to lock in a fixed rate deal and how long for. You might struggle to come up with a decision you’re 100% confident with by yourself. If you’re in this position, then speaking with a qualified and experienced mortgage advisor, like those we work with, can help.
