Homebuyers could struggle with mortgages as UK banks tighten affordability tests

estate agents

Homebuyers wanting to take out a mortgage could soon struggle to get the size of loan they need, as banks begin taking into account the cost of living crisis when calculating how much they can lend.

Mortgage brokers have said soaring energy bills, the national insurance rise and a big increase in the cost of household goods are set to prompt banks to tighten their mortgage affordability tests, making it harder for consumers to borrow as much as previously.

Santander is now updating its affordability models as households experience a surge in the cost of living. Mortgage brokers told the Guardian that they expect the other big lenders – HSBC, Barclays, Lloyds Banking Group and NatWest – to follow suit.

Any significant reduction in the size of loan offered would be expected to slow the property market, as buyers would be forced to downgrade their ambitions.

Since the financial crisis more than a decade ago, mortgage applicants have had to undergo strict affordability checks. Borrowers typically have to fill in long documents in which they state all their significant outgoings, including monthly expenses on childcare, car repayments and even how much they spend on the gym.

Ray Boulger, a senior analyst at the broker John Charcol, said: ‘This is arguably the biggest tightening in mortgage lending since 2009 because interest rates are increasing, and we are experiencing the largest rise in the cost of living since the 1980s. The difference between now and back then is that banks had a huge shortage of funds then, whereas now the banks are looking at what their customers can afford.”

David Hollingworth, a director at Bath-based mortgage brokers, L&C, said: “As customers face soaring energy bills and big hikes in other household costs, it is inevitable that lenders have to start factoring this when calculating how much to lend to a customer. It comes at a time when mortgage rates have pretty much doubled in just over six months, albeit that they are still at historically low levels.”

Many banks rely on household spending figures from the Office for National Statistics (ONS) to judge a borrower’s spending – even if an applicant’s actual monthly outgoings 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 might not be allowed to borrow as much in the coming months.

Santander told mortgage brokers last week it was updating its affordability test to reflect the latest ONS data. It will also take into account – albeit to a lesser extent – the increase in national insurance contributions and various tax rates.

Banks have already begun to implement more stringent “stress tests” on lending as interest rates increase. These are designed to check if borrowers can afford a standard variable rate plus 3%.

Tougher affordability checks and heightened stress tests could hit house prices. Halifax said the average house price hit a record £282,753 in March, a tenth higher than the previous year, marking the biggest annual jump since the financial crisis.

Russell Galley, a managing director of Halifax, said: “Buyers are dealing with the prospect of higher interest rates and a higher cost of living. With affordability metrics already extremely stretched, these factors should lead to a slowdown in house price inflation over the next year.”

Boulger said he expected prices to cool somewhat as consumers reassess their finances. “I expect prices to remain flat by the third quarter of the year,” he said.

Hollingworth echoed this sentiment and said one of the biggest drivers in price growth in recent months was the lack of supply, a factor that would “likely remain for some time”.

This is certainly the story in London right now, where analysts say rising demand has bumped against a shortage of properties for sale. In the first quarter of this year, London house prices grew at 7.4%, up from 4.8% in the same period last year, according to Nationwide.