What is a mortgage stress test?

A mortgage stress test checks whether you could still afford your monthly payments if interest rates rose above the rate you have actually been offered. Instead of only checking affordability against today’s rate, lenders build in a buffer, so the sums have to work at a higher hypothetical rate before an offer goes ahead.

Why do lenders use a stress test at all?

Interest rates can rise during the life of a mortgage, particularly once a fixed or tracker deal ends and the mortgage moves to the lender’s standard variable rate. A stress test is meant to reduce the risk that a rate rise leaves someone unable to keep up with payments. It protects the lender against arrears and, in principle, protects you from taking on more than you could manage if rates moved against you.

How is the stress rate worked out?

Each lender sets its own approach, and the detail is not published as a single fixed rule across the market. In general terms, a lender will test affordability against a rate somewhat above the actual rate on offer, sometimes referencing the lender’s own standard variable rate plus a margin. The exact figures are lender specific and can change over time, so it is not something we can quote as a fixed percentage here.

Does the type of deal change the stress test?

The type of mortgage you choose can affect how strictly the stress test bites. Our guide on fixed or tracker remortgages looks at this in more detail, but broadly:

• Tracker and variable rate deals move with the market, so lenders typically stress test against a meaningfully higher rate to allow for that movement.
• Fixed rate deals, particularly longer fixes, can sometimes be tested with a smaller margin under some lenders’ policies, since the payment cannot change during the fixed period itself.
• Interest-only mortgages are stress tested on the interest-only payment, which is lower than a repayment mortgage’s payment, though lenders also check the repayment strategy for the capital. Our guide on interest-only or repayment explains the difference.

How does this interact with bad credit?

A stress test is generally applied in the same way to every applicant at a given lender, whatever their credit history. Where bad credit tends to have a bigger effect is on which lenders will consider you in the first place, and on their own credit scoring and criteria, which our guide on how lenders assess affordability covers. Specialist lenders working with adverse credit still run a stress test; they are simply more willing to lend to someone with a CCJ, default or other credit issue once the affordability and stress test sums work.

What this means for a bad credit remortgage

If you are remortgaging with something on your credit file, such as a CCJ or a lower credit score, the stress test is not something extra applied because of your credit history. It is a standard affordability step that everyone goes through. What can add pressure alongside it is that adverse credit often narrows the number of lenders willing to offer you a mortgage, and some specialist lenders price more cautiously to reflect the higher risk they are taking on, which can itself affect the numbers used in a stress test.

A worked illustrative example

These figures are for illustration only, not a quote of any real lender’s stress rate. Suppose a lender offers an actual rate that would mean a monthly payment of £750 on the amount someone wants to borrow. For the stress test, the lender might instead check affordability against a hypothetical higher rate that would produce a monthly payment of, say, £980 in this illustration. If the applicant’s income, once outgoings and a living cost allowance are taken out, comfortably covers £980 a month, the stress test is passed and the actual, lower payment of £750 becomes very manageable in comparison. If the applicant could only stretch to £850 a month, the lender may offer a smaller loan, one where the stressed payment falls within what the applicant can afford, even though the real payment at the actual rate would have been fine. This is why two people borrowing the same amount at the same real rate can be offered different maximum loans, depending on how their income and outgoings perform against the stress figure.

What can catch people out with stress testing

• Assuming the advertised rate is what gets tested. The rate you are quoted is rarely the rate used for the stress calculation. Ask what stressed payment the lender is using, not just the headline rate.
• Not allowing for existing debts when estimating your own numbers. A stress test adds your outgoings, including any missed payment or default related repayment plan, on top of the hypothetical higher payment. Underestimating outgoings can lead to a disappointing offer.
• Overlooking that interest-only is stressed differently. Because only the interest is being tested, not any capital repayment, the maximum loan calculation looks different from a repayment mortgage. Our guide on interest-only or repayment explains this further.
• Expecting the same stress margin from every lender. Because there is no single published UK-wide figure, moving to a different lender, including a specialist one working with adverse credit, can change the maximum loan the stress test allows, even with identical income and outgoings.

Getting ready

Before you apply, it is worth asking a lender or adviser what stress rate they expect to use, since this varies. Reducing other borrowing where you can, and making sure your income is documented clearly, particularly if you are self-employed, can help the affordability sums, including the stress test, work in your favour. If your current outgoings already feel difficult to manage, speak to your existing lender and consider free advice from MoneyHelper or StepChange before taking on new borrowing.