Stress Testing

What is stress testing?

Stress Testing is a method used by lenders to gauge how robust a borrower’s ability to make payments would be if met with increasing monthly outgoings or a reduced income. This is most commonly used when taking out a mortgage as a means of assessing Affordability based on a series of hypothetical scenarios, though additional Affordability checks will also be carried out.

Stress Tests for mortgages were introduced by the Financial Conduct Authority in 2014 after a review of mortgage lending practices following the financial crisis of 2007-2008.

By passing these checks, the lender can be better assured not only that the borrower can make repayments, but also that there is a comfortable ‘buffer’ in their finances that mean monthly payments are unlikely to be jeopardised by one change in the borrower’s income or outgoings.

Stress Testing is also carried out by the Bank of England to assess the overall robustness of financial institutions in the UK such as banks and building societies against recession or economic downturn.


Q: What is checked as part of a stress test?

A: Elements of the stress test are likely to change between lenders, but may commonly include situations such as:

  • How monthly repayments would be affected by an increase in the Bank of England Base Rate
  • How disposable income would be reduced by having a baby
  • How your ability to repay would be reduced by being made redundant
  • How your ability to repay would be reduced following any gap in work
.

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