What is a ‘stress test’, and how do they work?

Are you coming to the end of a fixed rate mortgage or have your circumstances changed? For example, a new baby or job? We do a deep dive into one of the more complex concepts of mortgages and why your circumstances might affect them.

Have you heard of ‘stress tests’ before? Introduced in 2014, stress tests, aka an ‘income test’, are an important part of the mortgage process.

Lenders look at your ability to manage your repayments depending on your income, your family size, and your monthly outgoings. This ensures you don’t take on more debt than you can afford. On top of this, they then check to see if you can pay your mortgage if interest rates rise or if your financial situation changes.

Sometimes this might affect how much you want to borrow. But this process is so important. It helps avoid the risk of not being able to make your payments. A term known as ‘defaulting’.

The bank uses higher interest rate scenarios to ensure you get to stay in your home if anything happens. Such as in the event of economic downturns or interest rate changes.

It’s a simple way for lenders to ensure you can comfortably afford your mortgage payments over the long term.

Stress tests are proving to work. We’ve seen the Bank of England’s rate hikes increase mortgage rates by over four percentage points in the last two years. Raising the cost of repayments.

However, the market hasn’t seen major overdue payments and forced sales. This is dramatically different from the last high interest rates in 2009. (Before introducing stress tests.)

The Bank of England reveals successfully stress testing customers has helped people keep up with repayments. And because of this, help them keep their homes.

And researchers found that most borrowers who came to the end of a fixed term in 2023 faced lower mortgage rates than the rate at which they were ‘stressed’.

Fixed mortgages can take the uncertainty out of repayments. Are you coming to the end of your fixed-rate mortgage or on a variable loan? Speak to your mortgage broker about securing a new fixed-rate loan.

Time for a mortgage review?