Homebuyers may struggle with mortgages as UK banks tighten affordability tests | real estate market

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Homebuyers looking to take out a mortgage may soon struggle to get the amount of credit they need as banks begin to take the cost of living crisis into account when calculating how much to lend.

Mortgage brokers have said soaring utility bills, a rise in Social Security and a sharp rise in the cost of household goods will prompt banks to tighten their mortgage affordability tests, making it harder for consumers to borrow as much as before.

Santander is now updating its affordability models as households see an increase in the cost of living. Mortgage brokers told the Guardian they expect the other big lenders – HSBC, Barclays, Lloyds Banking Group and NatWest – to follow suit.

Any significant reduction in the size of the loan on offer would likely slow the real estate market as buyers would be forced to lower their ambitions.

Since the financial crisis more than a decade ago, mortgage applicants have had to undergo rigorous affordability checks. Borrowers are typically required to fill out lengthy documents detailing all major expenses, including monthly childcare expenses, car repayments, and even how much they spend on the gym.

Ray Boulger, senior analyst at brokerage John Charcol, said: “This is arguably the biggest mortgage tightening since 2009 because interest rates are rising and we’re seeing the biggest increase in the cost of living since the 1980s. The difference between now and then is that banks back then were severely short of money, while banks today care about what their customers can afford.”

David Hollingworth, director of Bath-based mortgage broker L&C, said: “As customers face rising energy bills and large increases in other household expenses, it is inevitable that lenders will need to take this into account when calculating the amount loaned to customers. It comes at a time when mortgage rates have nearly doubled in just over six months, although they are still at historically low levels.”

Many banks rely on household expenses from the Office for National Statistics (ONS) to assess a borrower’s expenses — even when an applicant’s actual monthly expenses are lower — to see if borrowers can afford their monthly mortgage after bills and expenses .

However, this ONS data will soon include higher energy costs, with the result that some people may not be allowed to borrow as much in the coming months.

Santander told mortgage brokers last week that was the case Updated its affordability test to reflect the latest ONS data. It will also take into account, albeit to a lesser extent, the increase in national insurance contributions and different tax rates.

Banks have already begun to apply tighter “stress tests” to lending as interest rates rise. These should check whether borrowers can afford a variable standard interest rate plus 3%.

Tighter affordability reviews and heightened stress tests could hurt house prices. According to Halifax, the average house price hit a record £282,753 in March, a tenth higher than a year earlier, marking the biggest annual jump since the financial crisis.

Russell Galley, a Halifax chief executive, said: “Shoppers are faced with the prospect of higher interest rates and a higher cost of living. With affordability metrics already extremely tight, these factors should lead to a slowdown in home price inflation next year.”

Boulger said he expects prices to cool down a bit as consumers reassess their finances. “I expect prices to be flat through the third quarter of the year,” he said.

Hollingworth echoed that sentiment, saying one of the biggest drivers of price growth in recent months has been the lack of supply, a factor that “is likely to persist for some time.”

That’s certainly the story in London right now, where analysts say rising demand has met a shortage of properties for sale. According to Nationwide, house prices in London rose 7.4% in the first quarter of this year, compared to 4.8% in the same period last year.

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