Mortgage stress test – how far do banks go?

When applying for a mortgage, you will hear many different terms, some of which may be unclear – one of these is the idea of a ‘mortgage stress test’. It is an important part of the decision making process for the lender and has a large impact on your mortgage application.

At Mortgage Finder we’re here to help you understand the stress test and make sure your application is presented in a way that maximises the likelihood of a successful approval.

What is the mortgage stress test?

As the term suggests, the stress test is there to see if you would be able to pay your mortgage if the situation were ‘put under stress’ – that is, made more difficult than it normally is.

Banks understand that interest rates rise and fall, and personal circumstances change. When you are taking out a home loan of 25 years, it is reasonable to assume that at some point during that period the interest may become unfavourable for a while. The banks, therefore, make a stressed calculation based on that possibility.

In real terms, this means they look at your affordability based on an interest rate of up to 4% higher than the current rate offered in the mortgage deal.

Affordability – the key factor for financial acceptance

Affordability is a measure of your disposable income; a figure that comes from taking your income and subtracting your outgoings. If you have a lot of spare cash at the end of the month, then your affordability is considered to be high, whereas if you run close to the bone, always hoping for the next pay cheque, then affordability is low.

Stress testing is a normal part of the mortgage process in most countries, including the UAE. The banks want to make sure that even in the worst possible circumstances, you can still make the monthly mortgage repayment, this means that affordability is a key concern for them. Most UAE banks score their affordability calculations based only on 50% of your income to take into account a drop in income, difficult months, or sudden unexpected important outgoings.

While this conservative approach to the loan criteria can make the initial application more challenging, it does give both you and the banks the security of knowing that the mortgage won’t put too much strain on your finances, even if times get a little harder.

A positive future outlook – best case vs. worst case scenarios

It is only natural that as the borrower looking to buy a property, you will view your own finances in a best case scenario. You may feel secure in knowing that you will have an increased salary in a few years, or that a promotion is guaranteed after five years with your employer. This best case outlook will have you looking to stretch your limits and view homes that are at the edge of your affordability.

Quite sensibly, however, banks are keen to apply a worst case scenario to your mortgage application. They do not wish to lend on the promise of a better tomorrow, but are looking for the provable security of today.

Through mortgage stress tests, they do what they can to guarantee this security and lower the risk – protecting both themselves and you in the process.

When do banks apply the stress test?

Mortgage stress tests are part of the very early stages of your mortgage application and take place during the pre-approval process. This is good for a number of reasons:

  • You can be confident that your pre-approval is a strong willingness to lend from the bank
  • The outcome of the stress test is known early, preventing both you and the bank from wasting time
  • You can view properties with the full knowledge of your budget limits, and the confidence that you can afford the mortgage in the long term.

It is important that you get your finances into order in the months before applying for your mortgage pre-approval, giving you the best chance of acceptance of the best mortgage deal available. Our mortgage consultants are best placed to discuss this with you and agree a plan of action, if necessary.

A second stress test

Passing the pre-application process and the stress test does not mean you can become lax with your budgeting and finances. The bank will apply the same strict criteria when processing the final full mortgage application, so make sure nothing changes negatively between the pre-approval process and the final completion date.

The effect of the mortgage stress test

It isn’t just a simple acceptance or rejection that can come from the mortgage stress test, the results can also determine the final size of your mortgage, and thus your total spending power.

It is widely believed that your net income is the only factor that determines the maximum size of your mortgage, but affordability and the stress test are also key. After all, it’s about what you can afford to repay based on your actual cash flow.

Different lenders have different stress tests

At Mortgage Finder we work with a range of different banks across the UAE, selecting from their many mortgage products to bring the right deals to our customers.

We have the insider knowledge regarding the bank stress tests to know which lenders are more lenient than others and can help you look to the provider that is right for you.

By taking advice from our specialists and including us in the process from the beginning, you greatly increase the chance of a successful mortgage application and ultimately buying the home you desire.

If you are considering a mortgage or simply want to know more about the mortgage stress test, contact our professional team today! Fill in our contact form or give us a call.