Biggest home loan squeeze in a decade

Biggest home loan crunch in a decade: Santander frantically begins cutting mortgages as banks clamp down on cost-of-living crisis

  • Rising costs of living are prompting banks to tighten mortgage affordability tests
  • Last week, Santander made it harder for borrowers to meet its lending criteria
  • HSBC, Barclays, Lloyds Banking Group and NatWest are considering similar moves
  • Sources say penal controls will make it harder to get bigger loans

Borrowers with mounting household bills and tight incomes may struggle to get the home loans they need as banks begin their biggest crackdown on mortgage checks in more than a decade.

Mortgage brokers have warned that soaring utility bills, tax hikes and soaring commodity prices have prompted banks to tighten their mortgage affordability tests — making it harder to borrow that much.

Last week, Santander made it harder for borrowers to meet its lending criteria because it told brokers it would reflect increases in household bills, Social Security and taxes.

Squeeze: Mortgage brokers have warned that rising energy bills, tax hikes and rising commodity prices have prompted banks to tighten their mortgage affordability tests

Brokers told The Mail on Sunday that the biggest high street banks – HSBC, Barclays, Lloyds Banking Group and NatWest – are all considering similar moves.

Property sources said the penal controls would make it harder to get bigger loans – meaning many people are at risk of not being able to buy the home they want.

They warned that households with high monthly bills — such as those with high credit card debt or divorced people paying large severance pay — would be particularly penalized.

Although mortgages were cracked down in 2014 when affordability rules went into effect, experts say rising interest rates and rising bills are making it even harder.

Ray Boulger, senior analyst at brokerage John Charcol, said: “This is the biggest tightening [in mortgage lending] 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 2009 is that back then the banks were in dire need of funds, while the problem today is that some people find it harder to borrow.’

One banker said: “Some lenders are already changing affordability tests behind the scenes to try to mitigate the cost of living problems that we are beginning to see.”

Banks are changing their “affordability calculators”.

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.

Last week, Santander told mortgage brokers it was updating its affordability test to reflect the latest ONS data. The increase in social security contributions and various tax rates are also taken into account.

It added that it is stepping up the stress test on its five-year fixed income operations — potentially making it harder to borrow for longer.

Andrew Montlake of mortgage broker Coreco said: “We’re starting to hear that banks are tightening affordability reviews. All lenders talk about it. You see a situation where some people can’t borrow what they need, which means they have to look for cheaper real estate – in cheaper areas.

“I suspect some people will be left short, especially those who need big loans with small deposits.”

Other banks could soon follow suit. NatWest said its affordability tests are “constantly reviewed based on market conditions.”

Barclays said, ‘We continually monitor the cost of living and, as appropriate, continually reflect changes in our key affordability models and assumptions.’

Banks have already begun to apply tighter “stress tests” to lending as interest rates rise. It is designed to test whether borrowers can afford a standard variable interest rate plus 3 percent.

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.”

In another blow to homeowners, the average fixed-rate mortgage rate has risen since the beginning of the year after the Bank of England decided to raise interest rates.

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