Average rates for all LTVs
May 2022 | May 2023 Article continues after advert | November 2023 | April 2024 | May 2024 | |
Average two-year fixed rate | 3.03% | 5.26% | 6.29% | 5.80% | 5.91% |
Average five-year fixed rate | 3.17% | 4.97% | 5.86% | 5.39% | 5.48% |
Standard Variable Rate (SVR) | 4.78% | 7.37% | 8.19% | 8.18% | 8.18% |
Data shown for the first available day of the month. Source: Moneyfacts Treasury Reports | |||||
The FCA’s responsible lending rules remain in place after the BoE’s Financial Policy Committee withdrew its affordability test recommendation in August 2022.
The latter specified that lenders should assess whether borrowers could still afford their mortgage during the first five years if their rate increased by 3 percentage points above the contractual reversion rate.
Nationwide’s director of home, Henry Jordan, agrees that affordability being stressed at around 9 per cent has made it more difficult, especially for first-time buyers.
“Regulation has changed from a 3 per cent addition to SVR, to a 1 per cent addition to SVR; but rates have more than increased by that amount,” he says.
“The issue with the stress rate is by linking it to revert rates and applying a loading to it, it can become very high and become the dominant factor [in how much you can borrow]. But that's generally only in a high-rate environment.”
Regulation also provides lenders the flexibility to apply a different stress rate where the initial rate is fixed for five years or more. Nationwide, through its Helping Hand proposition, enables first-time buyers to borrow up to around 20 per cent more if they commit to a five or 10-year fixed rate.
“That allows us to apply a different stress rate to our standard position, and therefore more of those first-time buyers can qualify to borrow 5.5 times income,” says Jordan.
“At a fixed rate of five years or longer, then the lender can generally determine their own stress rate within those rules. It basically gives us more ability to set our own stress rate, rather than just work to that fixed SVR plus 1 per cent.”
Flexible stress test applications
But not all lenders apply different stress tests when the rate is fixed for at least five years.
Boulger at broker John Charcol says that while many lenders offer a higher maximum loan on a fixed rate for at least five years on buy-to-let mortgages, with residential mortgages most lenders have the same maximum whatever the initial fixed rate.
At Yorkshire Building Society for example, Merritt says the lender does not differentiate between two and five years, and that the same stress test is applied regardless of the deal period.
“There's a couple of reasons,” he says. “Some of this is historic; so when we're in a low interest rate environment and you were borrowing at 1 to 2 per cent, we still wanted to check that regardless of the [deal period] that you were taking, you could weather an increase on that interest rate.
