Santander becomes first bank to make huge change to mortgage rules to allow buyers to borrow up to £35k MORE
SANTANDER has become the first lender to make changes to its affordability testing to allow customers to borrow up to £35,000 more.
The major high street bank has reviewed its residential affordability rates and reduced them by 0.75% across the board, bringing them to the lowest level since 2022.
It said that in real terms, this should allow customers to borrow up to £35,000 more, depending on their individual circumstances.
When lenders offer mortgages to customers, they have to conduct affordability tests to determine how much each borrower could realistically afford to take on.
As part of this, lenders have to conduct “stress testing” to determine whether the customer would still be able to afford their mortgage payments in a range of scenarios.
This includes taking account of the impact of any likely interest rate increases over at least the next five years on the customers’ mortgage payments.
However, under rules by the City watchdog, the Financial Conduct Authority (FCA), lenders have flexibility with how they design these tests based on the current market conditions.
Earlier this month, the FCA reminded lenders that they are allowed to tweak their stress testing based on market expectations.
It said that in light of falling interest rates, lenders may be unnecessarily stopping customers from taking on mortgages that they could realistically afford as they are not utilising this flexibility.
Santander has now become the first lender to announce it has taken the FCA’s guidance on board and changed its rules.
David Morris, head of homes at Santander UK, said: “We’re thrilled to be the first major lender to respond to the updated FCA guidance, alongside introducing a range of reduced mortgage interest rates today, fulfilling our role as a responsible lender while helping more customers to borrow what they need to release their home aspirations.”
Experts are generally positive about the announcement, although stressed that it is important customers are careful not to take on loans they may struggle to afford down the line.
Rachel Springall, finance expert at Moneyfactscompare.co.uk, said: “Lenders have been urged to do more by the government to support first-time buyers, to boost growth in the economy, thus recent debates on the loosening of lending rules.
“It is positive to see a major lender reviewing its affordability rates to widen the chances for buyers to acquire a mortgage. This comes after the FCA encouraged lenders to design their affordability rates to best meet their customers’ needs.”
Gloomy forecast for mortgages
The boost for homeowners from Santander comes after homeowners were warned to brace for more mortgage pain after a subdued Spring Statement earlier this week.
The government’s forecast update confirmed the stamp duty holiday, set to end on March 31, will not be extended, meaning tens of thousands of first-time buyers face a hefty tax bill on their house purchases this spring.
Meanwhile, inflation is still coming in at 2.8% for February, down slightly from 3% in January but still higher than the Bank of England’s target of 2%.
Higher inflation generally leads to higher mortgages costs, as the Bank of England typically holds or increases its base rate, which sets interest rates, to bring down inflation.
While the Bank of England has made several rate cuts in recent months, its rate-setters voted to maintain the base rate at 4.5% earlier this month.
Delaying further cuts spells trouble for the 1.8million homeowners whose fixed-term mortgaes – taken out in a very different climate, when rates were much lower – are approaching expiry.
This is why the FCA has been calling for lenders to tweak their lending criteria to help more people get on the property ladder.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, explained: “Affordability has been an increasing issue for many potential buyers and has shown signs of affecting demand in the housing market, given that mortgage approvals fell back at the end of the year.
“Mortgage rates have been stubborn and the stamp duty holiday has ended which may also price some buyers out of the market.
“The government wants to keep the housing market moving and enable more people able to get onto the ladder, which is why the FCA called for a change in lending criteria.
“Santander’s move will enable more people to buy houses which had been out of their reach.”
How to get the best deal on a mortgage
There are different factors that go into getting the best mortgage rate. Chris Sykes, technical director at broker Private Finance explains what you need to know.
- Bigger deposit
The larger the deposit you have the lower the rates you’ll have access to.
The different deposit tiers offered by lenders are generally 0-1% deposit, 5%, 10%, 15%, then generally it skips to 25% and finally cash or equity of 40% or more.
There are some exceptions in between but these are usually the bands.
Lenders then set different rates for each of these tiers, rather than having one rate for a 12% deposit and another for 14%, for example.
With a deposit above 40% there is usually no price fluctuation, which means you’d get the same rate with a 50% deposit to a 40% deposit.
- Keep your credit score healthy
A better credit score doesn’t necessarily mean more competitive deals, but a negative credit could mean worse deals.
For example, there may be some people with not a lot of credit as they’ve never had a credit card, or loan, will get the exact some deal as someone who has more credit history and a better credit score.
However, a bad credit history or score starts to limit your lenders and means you may need to move off high street to a more specialist lender which tends to offer higher rates.
If you have poor credit, look for easy ways to improve it.
- Look six months before your fix ends
It’s best to look at deals six months before a current rate ends. This might be to just have a chat with a broker and get things moving.
It might be that you can get a deal lined up and locked in that protects against movements in interest rates – for example if rates were to go up over the following six months. And you can also then improve the rate within that six months if rates were to go down.
- How to find a good broker
A good mortgage broker is invaluable for navigating the options available to you.
The best way to find a good adviser is through personal recommendations, everyone has a friend or family member who will have recently bought or refinanced – ask them who they used and if they were happy with the service.
You can also lookup reviews of that person online to find other customer experiences too. Unbiased.co.uk is one place where people can offer their reviews.
- Sort your paperwork
IF you are looking to buy or remortgage, contact a broker nice and early, as they can then guide you through what the expectations are from lenders.
This gives you plenty of time to make sure your accounts are up to date if you’re self-employed and you can see if it is worth filing tax returns early.