"Lenders already stress affordability at much higher rates, so there remains a question mark over whether the current situation will have any impact on mortgage affordability."
The recent surge in inflation is leading to higher prices for everyone and has stimulated the recent increase in market interest rates. This increase has already been factored into the cost of fixed rate mortgages to some extent, but swap rates are continuing to rise.
From an affordability perspective, however, it’s worth noting that lenders already stress affordability at much higher rates, so there remains a question mark over whether the current situation will have any impact on mortgage affordability.
The Bank of England is currently considering allowing lenders to stress affordability at much lower rates, but as the cost of fixed rate mortgages rises, those lenders that use five-year fixed rates to assess affordability may have to rein in how much they will lend.
The main issue, however, will be how substantial increases in the cost of living will show themselves in the ONS' figures and HSBC has already hinted that affordability could well be impacted by this. It will probably affect those clients on lower incomes first, as their net disposable income will be affected more than those on high salaries. There is already a divide between a client earning £25k per annum and one earning £100k. At the higher income you could expect, with a 15% deposit, 16 lenders that are happy to lend at five times and above. Not one lender would apply the same LTI on the lower salary. Of course, the cost of living increases will affect everybody, but those with higher net incomes will be able to cope with them much better as they have the buffer to absorb the rises.
It will be interesting over the coming weeks to see what impact these increases will actually have on the market. Of course, however in most cases, lenders will apply a different calculation behind the scenes so an accurate affordability calculator will become even more important over the coming months, especially for those brokers whose client base is not entirely made up of high earners.
