Nationwide has introduced a notable change to its mortgage lending criteria, which could allow borrowers to access larger loans. The UK’s largest building society has revised its ‘stress rate’ calculations — a key part of the affordability checks carried out during mortgage or remortgage applications.
Stress rates are used by lenders to assess whether borrowers could still keep up with their mortgage repayments if interest rates were to rise in future. These are hypothetical scenarios designed to test the resilience of a borrower’s finances under less favourable conditions.
Typically, lenders apply stress rates that are two to three percentage points above the rate being offered. For instance, someone applying for a 4% mortgage might be assessed on whether they could afford repayments at 6% or even 7%.
There are various stress test levels depending on the loan term and borrower circumstances. These measures were widely adopted following the 2008 financial crisis to help prevent lending that could become unaffordable under economic pressure.
While intended as a safeguard, some in the mortgage industry argue that the current stress rates are too strict. They believe that the rules can exclude individuals who are financially stable and capable of affording repayments, but are unable to meet the theoretical criteria.
Under the updated lending criteria, borrowers could now be eligible to borrow up to 6.18 times their salary, compared to the previous limit of 5.23 times. This change has the potential to significantly increase borrowing capacity for some applicants.
Despite this shift, banks still face restrictions on how much they can lend beyond a certain threshold. Currently, only 15 per cent of a lender’s mortgages can be above 4.5 times the borrower’s income. Nationwide, however, is urging the Bank of England to raise this cap.
David Hollingworth, associate director at mortgage broker L&C Mortgages, highlighted how this change could benefit those looking to get on the property ladder. He noted that Nationwide’s focus on first-time buyers means that lowering stress test rates could help more people access the higher end of its ‘Helping Hand’ scheme, which allows borrowing up to six times income.
Hollingworth also pointed out that the change could support existing homeowners. Borrowers approaching the end of their current deals may have previously worried about meeting affordability criteria due to high interest rates. With the revised approach, they may find they can borrow more than they expected, potentially making switching lenders or remortgaging more accessible.
This move is expected to give borrowers more flexibility by opening up greater choice from the wider mortgage market, rather than limiting them to sticking with their current lender.
Nationwide is not the only lender to have made such changes recently. Lloyds Banking Group led the way last month by reducing its stress rates. According to their estimates, the average borrower could now access an additional £38,000. This update applies across the group’s brands, including Lloyds, Halifax, and Bank of Scotland.
Following this, HSBC and its sister bank First Direct also made adjustments to their stress testing, allowing borrowers to access around £39,000 more. Similarly, Santander has followed suit, reportedly increasing the average borrowing amount by £35,000.
These changes come in response to guidance issued by the Financial Conduct Authority (FCA). The regulator has urged lenders to ensure their affordability tests do not unnecessarily limit access to mortgages, especially as interest rates begin to fall.
Henry Jordan, Nationwide’s director of home, acknowledged the affordability challenges many face. He emphasised that the lender’s decision, combined with its established Helping Hand scheme, demonstrates its commitment to supporting aspiring homeowners.
He went on to say that while the FCA’s revised guidance on affordability could encourage more people to get on the property ladder, the Bank of England’s 15 per cent cap on higher loan-to-income lending restricts how effective these changes can be.
Nationwide continues to advocate for a review of this cap. Jordan concluded that lifting the current limit would allow more borrowers to benefit from greater access to mortgage products and support long-term homeownership across the UK.
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