Halifax has recently announced that the stress rates used in their affordability calculation will be lowered. Typical customers will see an increase of around 13 per cent in the maximum amount they can borrow – potentially around £38,000 more, which is clearly good news for future homebuyers.
One of the hurdles of getting on the property ladder after you’ve saved (or been gifted) a deposit is passing a lender’s affordability assessment, which can be a challenge. However, recent “encouragement” from the Financial Conduct Authority (FCA) has led to lenders like Halifax relaxing these assessments and opening up possibilities to more borrowers.
Here we analyse what lenders are doing and what it means for you as a homebuyer – as well as clarifying what an affordability assessment actually is!
Affordability assessments 101
When you’re borrowing hundreds of thousands of pounds, a lender wants some comfort that you’ll be able to make your monthly repayments, now and in the future.
As part of your application, they’ll review your credit history to get an idea of the type of borrower you are. Missing payments, exceeding credit card limits and defaulting on agreements are behaviours that can restrict your access to products. Responsible financial behaviour is always important.
To get an understanding of your current financial situation, lenders will want to see evidence of your income and expenses, your payslips and bank statements. They’ll also want to understand any ongoing financial commitments you have like loans, credit card balances and childcare costs.
Then they’ll perform various “stress tests” to see if repayments are manageable in different scenarios – such as interest rates unexpectedly rising higher.
“Affordability assessments vary between lenders. The focus goes deeper than just your headline salary and looks at your overall financial resilience” advises Sonya Matharu, founder and adviser at The Mortgage Atelier.
The stricter the assessment, the more challenging it will be to borrow the amount you want. But now we’re starting to see some lenders make changes.
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Incoming changes
Santander recently reduced its mortgage affordability stress test rate which, according to them, will mean homebuyers can borrow between £10,000 and £35,000 more than previously, depending on their earnings and other factors.
Miranda Hickey, mortgage adviser at Meet Margo, shares that “Atom Bank now consider up to 6x salary on ‘prime’ and ‘near prime’ mortgages, which applies to customers with light adverse credit history. Additionally, Precise Mortgages has recently announced improved affordability on their 2- and 3-year fixed rates.”
This is worth noting if you’ve had some credit blips in the past and you think that a mortgage is out of reach because of them.
We’ve also seen Nationwide change their criteria and lower rates significantly.
“They’ve dropped the minimum annual income for sole applicant to £35k on their Helping Hand product which, if you fix for five years, gives you six times income as a first time buyer,” advises Joanna Connolly, broker at The Mortgage Mum. “April Mortgages, which is relatively new to the market, has introduced 25 per cent more affordability on their products.”
Atom Bank, Precise Mortgages and April Mortgages are lesser-known lenders and you can only access their products through a mortgage broker – but they could have the right product for you, so don’t immediately discount them.
Innovation in the mortgage market
We’re starting to see new types of mortgage products too.
There are now those that help you reduce the mortgage that you need, like Gen H’s New Build Boost scheme for anyone buying a new property through Persimmon homes. With this scheme, you can put down a 5 per cent deposit, get an 80 per cent LTV mortgage and Gen H will give you a 15 per cent equity loan – making it more possible that you’ll pass an affordability assessment.
Products exist too that allow you to purchase a property with just a one per cent deposit, such as Accord’s mortgage product for houses and flats worth up to £500,000 – with just a £5,000 deposit.
It’s even possible to buy a home with no deposit at all. Unsurprisingly, with no deposit your options are limited. One lender stepping into that gap is Skipton Building Society with their Track Record mortgage product.
“This is for those who are able to show a track record of affording their full rent but whom haven’t been able to save for a deposit” advises Annie Ryan, mortgage and protection advisor at Barfield Financial.
For this type of product, the risk of negative equity – borrowing more than the property is worth – is high and needs to be at the forefront of your mind, to start overpaying as soon as possible.
Future outlook
It seems that lenders are trying to do what their name suggests…lend. They’re changing affordability assessments and thinking creatively about how they can lend responsibly, but also lend more.
If you’ll be applying for a mortgage in the next couple of years, it’s important to get the right information early on.
Trying to navigate the mortgage market isn’t easy. Having an advisor on your side, testing out what’s possible for you even before you’re ready to apply, can be priceless. It’ll also save you setting your heart on a property outside of your reach – or advising you when matters might have changed in your favour.
Ms Matharu shares one such incident as a final reminder that change works both ways: “When I re-ran the numbers for a client using the exact same data from October 2024, their borrowing potential changed dramatically. Same profile. Same income. A completely different outcome. It’s a reminder that borrowing potential isn’t fixed.”
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