With mortgage rates now increasing, both current and prospective homebuyers need to be aware of the increase in their mortgage repayments when interest rates eventually rise.
The Mortgage Market Review (MMR) was officially introduced by the Financial Conduct Authority (FCA) in April to allow lenders to determine a borrower’s affordability. Here the UK’s leading independent mortgage broker, Mortgage Advice Bureau, reveals how the Mortgage Market Review’s stress test could help buyers prepare for the future.
Under the MMR rules, lenders must check that you can afford your repayments both now and in the future, and they do this through processes such as mortgage stress tests. The stress test gives lenders all the information they need regarding your finances, from how much you earn to how much you spend on food, utilities and even leisure.
“With a base rate rise inevitable, the FCA has stated that borrowers must not receive a loan if a bigger mortgage repayment could ‘break’ their finances. You will be extensively checked, with your day-to-day finances and spending coming under intense investigation,” said David Treharne from Mortgage Advice Bureau.
“Research carried out by Experian this month revealed that homebuyers are underestimating what their mortgage repayments could be by as much as £650 if interest rates were to rise. Whilst this may sound like a frightening statistic, this is one of the main reasons why the MMR has been introduced to the market.”
As well as ensuring that a return to irresponsible lending that took place in the run-up to the credit crisis is avoided, the MMR aims to protect borrowers from falling behind on their repayments so doing a check now will prepare you in good time for when rates rise.
When the Bank of England’s Monetary Policy Committee votes to increase the base rate, expectations are that it will be increased in a controlled manner until it reaches between 3-6 per cent to minimise the risk exposure level.
David added: “If a homebuyer was to purchase a £235,000 property and had a combined average household income of £50,674, research by Experian shows that they are claiming they can afford an average mortgage repayment of £780 per month. However, if rates were to increase by 5.5 per cent at the end of a typical two-year fixed deal, the homebuyer could find themselves paying around £1,440 per month!”
As the economy continues to improve, interest rates are inevitably going to rise. This is why it is better that the MMR is letting borrowers know now how much they can afford, rather than a year from now, when it is too late.
“Whilst the MMR continues to look to the future, so should you. Regardless of what measures are taken by the Bank of England and the Government, there is always going to be a risk factor when taking out a mortgage, which is why considering taking out income protection insurance and seeking professional advice should be a serious consideration,” concluded David.
For further information please contact David on 07501 720320 or email davidtr@mab.org.uk. Alternatively, please visit www.dawsonsproperty.co.uk