Barclays has increased its mortgage rate ‘stress test’ for residential applications to 6.99 per cent, following guidelines from the Financial Policy Committee.
The stress test is used to check that borrowers can still meet mortgage repayments if interest rates go up and is one of several affordability factors that must be factored in under the Mortgage Market Review.
Borrowers will need to be able demonstrate a mortgage would still be affordable at this near-7 per cent level, should the Bank of England raise the base rates sufficiently during the life of the mortgage. The previous rate applied was 6.74 per cent.
The new criteria will take effect from tomorrow (19 August). The affordability rate for Family Springboard mortgages and applications for loans under the Help to Buy mortgage guarantee scheme will remain at 7.24 per cent.
Barclays’ move follows that of Nationwide, which FTAdviser revealed in July had increased its ‘stress rate’ to 6.99 per cent. The lender declined to confirm what the previous rate was.
The announcement came alongside confirmation from the building society that it would impose a maximum income multiple of 4.75x gross income for all residential lending, including all income types.
Measures across the sector have come in the wake of recommendations from the Financial Policy Committee in June that mortgage lenders limit the proportion of customers able to take out a mortgage at more than 4.5 times their earnings to 15 per cent.
It also recommended that lenders apply an affordability stress test rate that factors in an increase in the base interest rate of 3 percentage points in the first five years of the loan.
The Financial Conduct Authority said that following the FPC’s recommendations, it will consult on general guidance which will provide details on how it proposes to follow the loan-to-income ratios.
Last week, Bank of England governor Mark Carney said that ‘normal’ interest rate rises are unlikely to be higher than those of ‘yesteryear’ and will only hit 2.25 per cent by the first quarter of 2017.
Mr Carney said: “The path of bank rate implied by market yields, and on which this forecast is conditioned, rises by only 15 basis points per quarter and reaches only 2.25 per cent by the end of the forecast period.”
