I see that AIB have now started "stress-testing" mortgage applications at 5%. Stress-testing is a process by which a lender evaluates an applicant's ability to repay a loan if interest rates increase.
Given that their actual variable rates for new customers vary between 2.25% and 2.65% they are factoring in potential future rate increases between 2.35% and 2.75% in assessing a customer's ability to repay. This is well in excess of the Financial Regulator's guidelines on stress-testing and AIB are to be commended for it. It may result in their losing business to competitors who will stress test at a lower rate, but recent events have shown that being the lender who will offer the biggest loan isn't necessarily a good thing.
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Liam - do banks include an ability to pay in stress tests given a decrease in income as well as an increase in interest rates?
Thanks for the comment.
I'm not aware that banks factor in a potential decrease in income. However, they will use current rates of taxes, PRSI & levies in their calculations so as income levies get added or increased, they are used in calculations.
Banks will generally take a person's occupation into account so those working in industries that have been hardest hit by the recession (e.g. construction) will need to prove that their own job is relatively safe.
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