Major lenders relax mortgage rules, in shake-up that could see average borrower loaned £38,000 more

Lloyds Banking Group has relaxed its mortgage rules, meaning the typical household could potentially borrow £38,000 more.

The changes could boost borrowers' budgets when taking a mortgage with any of the banks in the group: Lloyds, Halifax, Bank of Scotland and BM Solutions.

It says typical customers may see increases around 13 per cent in the maximum loan available.

For a family of two adults and two children with a total household income of £75,000 and no major credit commitments it estimates that could mean an extra £38,000 on the mortgage.

In this example they would be buying or remortgaging with a 25 per cent deposit, and taking a two-year fix on a 25-year mortgage term.

It follows hot on the heels of another major bank Santander, which last month relaxed its mortgage affordability rules to enable customers to borrow up to £35,000 more.

The changes have been made possible because the lenders have changed what is known as the 'stress test rates'.

When someone applies for a mortgage, the bank uses the stress rate to test whether the borrower could keep paying if their interest rate went up.

Commonly, lenders will check that a borrower could pay a mortgage rate up to three percentage points higher than their current one, so if they had a rate of 4 per cent their finances might be tested against a 6 or 7 per cent rate.

From today, Lloyds group borrowers taking a five-year fix to purchase a home will be tested against a 4.5 per cent rate, or their starting mortgage rate plus 0.5 per cent. They were previously tested against a 5 per cent rate.

Those taking a two-year fix will continue to be tested against 5.5 per cent, or their starting mortgage rate plus 2 per cent.

For those doing a like-for-like remortgage, the stress test on a two-year fix will be 5 per cent, reduced from 5.5 per cent, or their starting rate plus 0.5 per cent.

On a five-year fix it will be 4.5 per cent, reduced from 5 per cent, or their starting rate plus 0.5 per cent.

Last month, Santander reduced all of its stress test rates by 0.75 per cent, bringing them to the lowest level since 2022.

Aaron Strutt of broker Trinity Financial believes this is a significant change that will make it easier for people to borrow more money to get on the property ladder, remortgage, or move home.

'The current tight mortgage affordability stress tests are a real issue meaning that many potential borrowers are being told they cannot afford mortgages when they probably can,' said Strutt.

'Santander recently made similar affordability changes, which means other lenders will probably ease their lending rules as well.

'There are lots of schemes helping first-time buyers and higher earners to get more generous mortgage loan sizes, but in many cases, families struggle to borrow the amount they need.

'Many lenders want to issue more generous loan sizes, but the affordability rules have made it difficult. The new government has clearly changed something.'

Cutting stress test rates will open the doors for thousands of buyers, according to Sean Horton, managing director at Respect Capital

He told the news agency Newspage: 'Halifax's mortgage affordability changes mark a welcome shift in lending appetite.

'For many, this increased borrowing capacity bridges the gap that previously forced them to compromise on location or property size.'

The announcement comes one day after Moneyfacts revealed the number of mortgage deals available to those buying with either a 5 per cent or 10 per cent deposit has reached its highest levels since the financial crisis.

'Having more lenders offer extended affordability offers welcome support to first-time buyers and others looking to buy in the current market,' said Justin Moy, managing director at EHF Mortgages.

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'Halifax join a number of lenders such as Santander and Nationwide Building Society who lend extra funds based on stable payments for the next five years, which in turn gives buyers a greater choice of properties to purchase, or just enough to get on the property ladder.

'With rental options diminishing in many parts of the UK, ownership options are so important to those wanting greater control of where they live.'

Aaron Strutt of Trinity Financial says all homebuyers stand to benefit from the changes given that it could essentially be the difference in getting the dream home for some people.

'Many people spot properties they like and then use the lenders affordability calculators to find out if it would be possible to secure the mortgage they need,' said Strutt.

'At the moment, many can’t get enough money so they either have to go to specialist and more expensive lenders, or compromise on the property and borrow less money.

'This affordability change will mean more people do not need to shop around and that they can get the property they want. They may also not need to raise such a large deposit.'