Minimising mortgage lenders’ risk
When a lender decides to approve your mortgage, they are taking a risk that you will be able to repay it. Understandably, they want to feel confident that you will be able to keep up your side of the bargain, even if circumstances change.
So, as well as considering your mortgage application in current circumstances, lenders project different scenarios to check that your finances will still enable you to meet your monthly repayments. Significantly, stress tests are affected by the tax bracket that you are in for most lenders.
Common mortgage stress tests
Mortgage lenders will apply different tests, depending upon what sort of mortgage you are applying for, but common stress tests include:
- The financial implications if interest rates were to rise: For example, if a lender is considering offering you a mortgage interest rate of 3%, they will calculate the difference in monthly repayments if it were to rise to 5.5% and how that would sit with your other financial commitments.
- Anticipated voids in rental properties: The affordability of buy-to-let mortgages is normally calculated against rental income with 80% occupancy in a year, not 100%, to allow for the fact that you may well experience voids.
Applying your own mortgage stress tests
Ideally, applying a mortgage stress test is not a one-sided process. It’s important that you are also confident that you will be able to make your repayments, even if the very worst were to happen.
You may therefore want to factor into your financial projections life, critical illness or even redundancy insurance, which can provide valuable peace of mind that you or your family won’t be at risk of losing your home, no matter what life throws at you.