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What is a ‘stress test’ for borrowers?

When it comes to buying a home, most people need a mortgage to finance their purchase. Many people begin their home buying journey with a quick online search and a play with one of the many repayment or mortgage calculators that are available (you can try our one here)

While these calculators are great, the rates used are generally what the current rates are in the market at that time, however when it comes to actually taking out a mortgage, banks first need to determine that you could still make repayments should the interest rates actually rise past this.

This is where a “stress test” comes into play.

A stress test is a financial evaluation that assesses your ability to handle mortgage payments in the face of unexpected changes in the economy or your personal circumstances. Generally a bank will use an interest rate that is 2-3% higher than the current rates, to ensure that you can still make the repayments on your loan should the current interest rates rise.

If you can still service the loan at the stress test rates, then you are deemed to be able to borrow, as long as you meet any of the other criteria that the bank requires.

While it might sound harsh, the stress test is designed to protect both borrowers and lenders. For borrowers, the stress test ensures that they don’t take on more debt than they can handle, which can lead to default and foreclosure. For lenders, the stress test helps to mitigate risk by ensuring that borrowers can continue to make their mortgage payments even if the economy takes a downturn or if their personal financial situation changes.

All banks are different and the percentage that is used for a stress test can vary greatly from bank to bank. This is where using a mortgage advisor can be beneficial as we can determine which lender is best for you and your personal circumstances and future financial goals.

Give the team at Better Choice Mortgages a call today on 0800 005 676.



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