Affordability is likely to become better for consumers if the rate reductions are passed on to stress tests.
This is illustrated by a high street lender recently announcing that their stress test will be reduced by 0.25 per cent.
The importance of stress tests, particularly affordability, came to the fore after the introduction of the Mortgage Market Review (MMR).
Lenders are required to ensure they assess a borrower’s ability to repay a mortgage now, and in the future.
This means lenders should be taking the impact of potential future interest rate increases into account.
The Mortgage Market Review requires lenders, when assessing affordability, to apply an interest rate stress test that assesses whether borrowers could still afford their mortgage if, at any point over the first five years of the loan, the Bank’s base rate were to be 3 per cent higher than the prevailing rate at the beginning.
A reduction in the SVR could reduce the stressed interest rate a lender must apply, hence improving affordability.
In addition to the above, if a mortgage is fixed for five or more years, the pay rate can be used as the stress rate.
Therefore instead of using a stress rate of 7 per cent, for instance, lenders could choose to use a stress rate much lower than this (a good five-year fixed rate can currently be obtained for around 2 per cent).
Lee Travis, head of professional development at the Society of Mortgage Professionals, says: “With low five-year fixed rates, many new 10-year fixed rates and potentially room for even longer fixed rates, stress tests could become much more lenient.”
As a result of the decision to move to 0.25 per cent, Peter Rogerson, commercial director for mortgages at Virgin Money, says we should also see arrears and possessions continuing at low levels, which is a clear positive for the industry.
The Council of Mortgage Lenders (CML) also announced recently that the number of mortgages in arrears had continued to fall in the second quarter of this year.
This was ahead of the cut to base rate and arrears and possessions are now at their lowest level since records began more than 20 years ago.
According to the CML data, in 2014 the number of owner-occupied mortgages with less than 2.5 per cent in arrears stood in the six figures; it is now 87,900.
Arrears by bands as a proportion of total arrears 2.5% or more of balance outstanding
| Owner-occupied mortgages 2.5%<5% in arrears | Owner-occupied mortgages 5%<7.5% in arrears | Owner-occupied mortgages 7.5%<10% in arrears | Owner-occupied mortgages >=10% in arrears | Owner-occupied mortgages >2.5% in arrears | Buy-to-let mortgages 2.5%<5% in arrears | Buy-to-let mortgages 5%<7.5% in arrears | Buy-to-let mortgages 7.5%<10% in arrears | Buy-to-let mortgages >=10% in arrears | Buy-to-let mortgages >2.5% in arrears | ||
| Number | Number | Number | Number | Number | Number | Number | Number | Number | Number | ||
| Year | Quarter | ||||||||||
| 2014 | Q2 | 61,100 | 23,900 | 11,900 | 25,400 | 122,600 | 3,600 | 1,300 | 600 | 1,100 | 6,600 |
| Q3 | 57,600 | 22,300 | 11,300 | 24,400 | 116,000 | 3,200 | 1,200 | 600 | 1,100 | 6,100 | |
| Q4 | 54,200 | 20,600 | 10,200 | 23,100 | 108,700 | 3,100 | 1,200 | 500 | 1,000 | 5,800 | |
| 2015 | Q1 | 52,200 | 20,200 | 10,200 | 22,800 | 105,400 | 3,200 | 1,100 | 500 | 1,000 | 5,800 |
| Q2 | 48,900 | 19,800 | 9,900 | 22,400 | 101,000 | 3,100 | 1,100 | 500 | 1,000 | 5,700 | |
| Q3 | 47,200 | 19,400 | 10,000 | 22,700 | 99,300 | 3,000 | 1,100 | 500 | 1,000 | 5,600 | |
| Q4 | 44,900 | 18,700 | 9,900 | 22,700 | 96,200 | 2,900 | 1,100 | 600 | 1,000 | 5,600 | |
| 2016 | Q1 | 41,900 | 17,300 | 9,300 | 22,600 | 91,100 | 2,500 | 1,000 | 500 | 900 | 4,900 |
| Q2 | 39,600 | 16,500 | 9,000 | 22,800 | 87,900 | 2,400 | 900 | 500 | 900 | 4,700 |
