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Mortgage Applicants Face ‘Stress Test’

Mortgage Applicants Face ‘Stress Test’

MORTGAGE APPLICANTS FACE STRESS TEST – Under new tighter regulations on lending the leading mortgage companies have introduced a new ‘Stress Test’ that determines the borrower’s ability to pay their monthly mortgage cost even in the event of an interest rate rise.

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It’s likely, if the ‘stress test’ is applied consistently, that many potential borrowers will see their mortgage applications being turned down.

Will such a move suppress the growth of the housing market?  That of course is questionable for the rise and fall in housing prices is attributed to many factors, including demand and supply, interest rates, inflation but to mention a few.

The issue here is one of caution for the lenders don’t want to place themselves in a position similar to that of the sub-prime crisis where mortgages were handed out to anyone who applied, regardless to the risk of repayment.

The issues started back when George W. Bush initiated a Government backed program that allowed borrowers to buy a new home with 0% down.

Such a more alleviated the buyer of any risk and as mortgage lenders started running out of customers they turned to the poorer sectors of the population and offered mortgages that would ultimately be defaulted on; it was these mortgages that became widely known as the ‘sub prime mortgages’

In September 2013 during the Conservative Party Conference David Cameron unveiled the Governments new initiative to get the banks lending and the housing marketing moving again by helping first-time buyers get on the property ladder.

The scheme, ‘Help to Buy’ would see the Government providing security on the deposit allowing the mortgage lenders to provide mortgages with more confidence.

The ‘Help to Buy’ scheme has been surrounded in controversy for if borrowers defaulted on their mortgage repayments then once again the taxpayer would be forced into handing over money to cover the debt to the banks.

We continuously berate the banks for the lack of responsibility they had during the lead up to the 2008 financial crash and the years that followed.  With the banks controlling the flow of money and holding vast numbers of bonds on Government debt it was a full gone conclusion that Government’s both here and abroad would have no choice but to bail them out with taxpayer’s cash.

Was the ‘Help to Buy’ an irresponsible move by the Government?  We’ve already seen house prices rise sharply in relation to the scheme and some experts feel that this type of Government intervention could well create yet another housing bubble that will, like all bubbles, eventually burst and which could well put us in a worse situation to that of 2008 due to the debt being compounded.

The underlying issue here is one of ‘responsibility’ which is evidently a two way street in that both the lender and the borrower should clearly define the boundaries of affordability.

Will the ‘stress test’ have an impact on the housing market? Some feel that such a move could see a fall in housing prices; the worst case scenario being that housing prices fall to a point whereby homeowners are saddled with a debt on property that has negative equity.

Unfortunately measures need to be taken so that housing prices do not skyrocket and where an interest rate rise wouldn’t push borrowers over the edge.

Mortgage Market Review outlined by the City regulator, don’t kick in officially until April 26. But last night it emerged they are already being followed by most of the country’s big lenders; this could indicate that the City regulator does have concerns over the ‘Help to Buy’ scheme and the sharp rise in property prices since its introduction.

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