#TIL if you want this 2% mortgage you better be able to afford 12%

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Here’s a snippet of information that might help you avoid wasting time and damaging your credit score if you’re thinking about getting certain mortgages.

Today I learned that as part of their assessment of the risk of lending to you, lenders stress test applicants’ mortgage payments affordability, regardless of the product being applied for, on ‘worst case scenarios’ of how much payments would be if you were out of any fixed product period and interest rates went up.

The example I was given was for one of the more cautious mainstream lenders, Santander, who I was told stress test at their standard variable rate (SVR) +7%.

What this means is you might see them offering a low rate on a 2 year fixed mortgage, say 2%, that you are eligible for. But when it comes down to it, Santander will not offer you a mortgage based on that. They will offer you a mortgage based on your ability to pay each month if the payments were actually at SVR + 7%. Their SVR is 4.74%, so that’s 11.74%.

Obviously in this example I was given, Santander are simply being super responsible/risk averse by requiring you to have plenty of money before they will take the risk of lending to you. Fair enough. Their call as a lender.

However from your side, you could be wasting your time and damaging your credit rating applying for that low rate unless you understand how much your payments would be at 11.74%, and how that affects the deal.

For example, say you are looking at remortgaging, when you still owe £200,000. Your current monthly payments are £800. As you can comfortably afford to spend £1,000 a month you could make the odd overpayment here and there. That decent 2% Santander offer would bring your monthly payments down to £739 (30 year term) so you apply. Now consider that at the stress test level of 11.74%, the payments on that mortgage would be £2,017.

It’s worth understanding this because in this scenario the lender will figure out how much you could afford at those stress levels, and only offer you that much.

We’ve stated that you could afford £1,000 a month. Well, if the rate was 11.74%, you cross £1,000 a month monthly payments at a loan amount of £100,000.

So what would happen is you would get accepted for their nice 2% mortgage offer at £739 a month, but they will only offer you £100,000: half the amount you actually need, which is totally useless to you.

Net result: you get a negative mark on your credit score for applying for that mortgage that was never going to work for you. You’ve wasted your time.

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