The lenders main area in deciding whether to lend to you, or not, is on your ability to pay the mortgage both today and also in the future. It’s difficult to detail when I have a limited word count, but in the main, lenders will stress test all mortgages against a possible rate rise and underwrite the applicants based on their ability to pay at the higher rates.
The regulators want lenders to ensure the customer can afford their mortgage for at least the next five years. So, for example, a shorter term deal may be stress tested at a pay rate of, lets say, 3% plus 3 percentage points higher than the prevailing rate at origination, so in this case 6%. However, a five year (or longer) deal may be stress tested against the pay rate, which might only be 3% in current climates. This can make quite a difference when it comes to calculating the affordable loan amount over the first five years of the loan, subject to the lenders terms and conditions. Longer term fixed rates can also be good for the end consumer as they should get the loan they want, but also the monthly payments remain fixed for the next five or more years.
Whilst in the ‘planning’ frame of mind, and with so much talk about rates increasing, have you reviewed your current financial arrangements to ensure sure you are on the best deal available?
Whether you require the security of fixing your payments for an amount of time, or whether you are a bit of a risk taker and might look at a short to a medium term tracker, right now, there are a number of attractive five year deals, and also some ten year deals currently available. Potentially great value if you know your plans for the longer term and prefer to fix your monthly payments.
Finally, when you come to the end of your product term, your current lender may write to you offering you some products to stay with them. However, STILL do your homework and shop around. These may look good, but there might be better options available to you elsewhere!