The Bank of England recently reduced the base rate to 4.5%, with further cuts expected later this year. This reduction has already had a significant impact on mortgage affordability.
Lenders’ Stress Test and Affordability
Lower interest rates can enhance mortgage affordability by easing the stress test thresholds. Lenders generally determine affordability by considering worst-case scenarios, adding a set percentage to their standard variable rate (SVR). As SVRs decrease in line with the base rate, a greater number of buyers are able to qualify for mortgages. A fall in the SVR means that all mortgage borrowers can borrow more than they could before the cut was applied
Santander’s Updated Affordability Calculations
Santander is the first to update its affordability calculations following the base rate cut. The new calculations reflect a reduction in residential affordability rates by 0.25%, making it easier for customers to borrow more. Brokers now have access to Santander’s best pricing for purchases, remortgages, and product transfers.
Assessing Your Borrowing Potential
We conducted an affordability assessment with Santander prior to the Base Rate update. Here were the details:
- Purchase price: £500,000
- Mortgage term: 25 years
- Combined salary: £105,000
- Dependants: 3 children
- Monthly childcare and financial commitments: £1,500
- Credit card debt: £5,000
The maximum loan available was initially calculated to be £336,031. Under the new assessment, the same situation can now achieve a loan of £346,788. While this increase may seem small, it can make the difference between securing a new mortgage or not. If rates were cut by 1% over the next 12 months, the total increase would be £53,785.
Increasing the mortgage term remains the most effective way to increase the amount you can borrow. However, this comes with other considerations, as you will pay more in interest over the lifetime of the loan. Extending the term from 25 years to 40 years increases the borrowing from £346,788 to £397,111.
Bank of England’s Next Base Rate Decision
The Bank of England’s next base rate decision is scheduled for March 20, 2025. This decision will be closely watched by the market, as further reductions could continue to boost affordability and buyer confidence.