Home buyers may be struggling with mortgages as UK banks tighten interest rates

Home buyers who want to take out a mortgage may soon struggle to get the loan size they need, as banks begin to consider the cost of living crisis when calculating how much they can lend.

Mortgage brokers say rising energy bills, rising national insurance and a sharp rise in the price of household goods will prompt banks to tighten their mortgage affordability tests, making it harder for consumers to borrow as before.

Santander is now updating its affordable models as families experience increased living costs. Mortgage brokers have told the Guardian that they expect other major lenders – HSBC, Barclays, Lloyds Banking Group and NatWest – to follow suit.

Any significant reduction in the size of loans is expected to slow down the property market, as buyers will be forced to lower their ambitions.

Since the financial crisis more than a decade ago, mortgage applicants have had to go through rigorous purchasing power checks. Borrowers usually have to fill out long documents to list all their important outgoing expenses, including the monthly cost of child care, car payments and even how much they spend at the gym.

Ray Bolger, a senior analyst at broker John Charcoal, said: “This is the biggest tightening of mortgages since 2009 because interest rates are rising and we are experiencing the biggest increase in living expenses since 1980. The difference between then and now is that banks had huge funding deficits, where banks are now looking at the capabilities of their customers. “

David Hallingworth, a director at Bath-based mortgage broker, L&C, said: . It comes at a time when mortgage rates have almost doubled in just six months, although they are still at historically low levels. “

Many banks rely on household spending statistics from the Office for National Statistics (ONS) to judge a borrower’s costs – even if an applicant’s actual monthly outgoing is low – to see if borrowers can afford their monthly mortgage after bills and expenses.

However, this ONS data will soon include higher energy costs, which will prevent some people from borrowing as much in the coming months.

Santander told mortgage brokers last week that it was updating its feasibility test to reflect the latest ONS data. This will also take into account – albeit somewhat – the increase in national insurance contributions and various tax rates.

As interest rates rise, banks are already beginning to impose stricter “stress tests” on lending. These are designed to test whether borrowers can afford a standard variable rate plus 3%.

More rigorous affordability tests and higher stress tests can hit home prices. Halifax said average house prices hit a record 2 282,753 in March, a tenth higher than the previous year, the biggest annual jump since the financial crisis.

Russell Galli, managing director of Halifax, said: “Buyers are working on higher interest rates and higher living costs. As the purchasing power metrics are already expanding, these factors will have to slow home inflation next year. “

Bolger said he expected prices to cool somewhat as consumers reassessed their finances. “I expect prices to remain flat in the third quarter of the year,” he said.

Hollingworth echoed this sentiment, saying that one of the main drivers of price increases in recent months was the lack of supply, a factor that “probably will remain for some time”.

This is certainly the story of London at the moment, where analysts say growing demand has pushed against the lack of property to sell. In the first quarter of this year, London home prices rose 7.4%, up from 4.8% in the same period last year, according to the nationwide report.