When it comes to getting a mortgage, there’s lots of jargon thrown around. The ‘mortgage stress test’ is one of these terms that you’ve probably never heard before. In this article, we’ll explain what it is, why it’s important for a lender as part of their decision-making process, and how it can impact your application.
What is the mortgage stress test?
The stress test is essentially an affordability test. It’s where lenders put your current financial situation ‘under stress’ to see if you could still pay your mortgage.
For example, if interest rates were to rise, or if you were to lose your job, or get a new job with a lower salary...would you still be able to repay your mortgage without any problems? These are the questions lenders want answers to, and so the ‘stress test’ is an affordability assessment that will help them to get those answers.
Typically, banks will ‘stress’ your finances and look at your affordability based on an interest rate of 1% or higher than the current rate offered.
When do banks apply the stress test?
Mortgage stress tests are part of the early stages of your application, usually taking place during the pre-approval process. If you don’t pass your stress test, then you may get approved for a lower amount by your lender.
That’s why it’s important to get your finances in order many months before applying for mortgage pre-approval in order to give yourself the best chance of getting your application accepted. If you need advice on this, then our friendly team of in-house mortgage experts is here to help and can discuss a plan of action with you.
Affordability - the main criteria for acceptance
To pass the stress test, your affordability is taken into account. Your affordability is assessed by looking at your monthly income and subtracting your existing liabilities. If you have a lot of disposable income, then your affordability is high. If you find yourself running out of money towards the end of each month, waiting for that next payslip to come through, then your affordability is low.
How banks do this is by calculating your Debt-Burden-Ratio (DBR). Your DBR is your monthly debts as a ratio of your income. Law in the UAE states that your total debt (including credit cards and loans) cannot exceed 50% of your monthly income. If you do, your mortgage application will be rejected.
Affordability is one of the most important factors a lender will look at when assessing your eligibility for a mortgage.
How can I pass the mortgage stress test?
Here are some quick tips to help you get your finances in order to help you pass the stress test and get your mortgage application pre-approved:
Live within your means. It’s easy to spend money. Too easy. But if you’re considering buying a villa or an apartment, then it’s time to get serious about how much you spend each month.
Pay down your debt. Credit cards, loans, or whatever it may be, it’s important to stay within your credit limit. Lenders will only give loans to financially responsible people whose debt ratios are low compared to their income.
Look for a property you can afford. It’s easy to view your own finances in a best-case scenario: “I’ll be getting a pay rise next year so I can afford this,”, you may be telling yourself. But this will mean buying a house you may struggle to afford until (and if!) you get that pay rise. Be sensible and look for a property well within your affordability instead of close to the edge.
Need advice?
Not sure if you’ll pass the mortgage stress test? You can try our mortgage calculator here to see how much you’ll need to repay each month to give you an idea of affordability. Or you can chat to our helpful team of in-house mortgage advisors who are here to help you every step of the way :)