Rise in National Insurance contributions – what impact will it have on mortgage lending?

Banks and other lenders will reduce loan amounts as they tighten up on their lending requirements in the wake of this week’s rise in National Insurance contributions, mortgage experts have said.

To adjust to clients’ challenging financial circumstances, lenders will use stricter ‘mortgage affordability assessments’ regarding a borrower’s take home pay, which may compel them to reduce the amounts they are willing to lend, Telegraph Money reported.

National Insurance payments for millions of workers across the UK went up on Wednesday, April 06, by 1.25 percentage points. However, the additional funding for the NHS and for social care comes just as the rise in everyday costs is squeezing people’s living standards, caused by spiralling inflation, which is now running at 6.2%, and soaring energy prices.

Read more: What challenges do mortgage brokers face for the remainder of 2022?

Charles Roe, the director of mortgages at UK Finance, said the tax hike would have an immediate impact on a borrower’s purchasing power.

He said the increased cost-of-living, as well as changes to National Insurance payments, “will reduce a borrower’s disposable income, which could affect the amount they are able to borrow.”

According to the Telegraph report, a person earning £50,000 will see a drop in earnings of approximately £464 a year, while a typical first-time buyer will expect to pay £260 more a year in National Insurance contributions.

Interest rates have also been rising over the last three months and now stand at 0.75% - the highest level since March 2020.

But worse is to come, with inflation expected to rise further and hit 7% before dropping later in the year. But if high inflation persists and there are demands for wage rises, rates could also reach 3.5%, according to the Office for Budgetary Responsibility.

The knock-on effect could be lower property prices as sellers adjust to a changing market by dropping their asking prices if buyers are given smaller loans.

There are additional clouds on the horizon, as mortgage approvals for house purchases fell to 71,000 in February, down from January’s 73,800, according to a report by the Bank of England, with experts suggesting that low housing stock is also having an impact on the number of buyers seeking mortgages.

Quoted in the Telegraph, Jonathan Harris, of Forensic Property Finance, said market forces would come into play, noting that sellers “need to be prepared to negotiate in order to cover the cost if borrowers can’t raise as big a mortgage as before”.

Read more: Average house prices reach record highs

However, Chris Sykes, from Private Finance, warned the housing market could be ‘crippled’ if banks stopped lending “higher multiples of the lower salaries to cover the difference”.

Ben Merritt, of the Yorkshire Building Society, gave a different outlook, saying that it was important to respond to the changing landscape and reflect homeowners’ ability to repay their mortgage, adding that the group had already factored in the rise in tax.

Mortgage Introducer reached out to other housing professionals. Andy Deeley, the director of lending at the Family Building Society, said the recent increases in lender standard variable rates (SVRs) would have more of an effect on affordability calculations than the change in National Insurance contributions. 

He said: “There’s a PRA consultation currently in progress on whether to remove this stress test, and if that comes to pass then the less restrictive FCA stress test at 1% over the revert to rate will come into the affordability calculations instead. 

“The increase in National Insurance contributions will certainly have a dampening effect on affordability calculation for five-year fixed rates, where these stress tests don’t apply.”

Paul Broadhead, head of mortgage and housing policy at the BSA, said: “The increase in National Insurance contributions that came into force this week is one part of a range of factors contributing to the well documented rise in the cost-of-living.

“It will have an effect on the amount that can be borrowed by some borrowers who were already at maximum affordability. Others will be less affected as most borrowers do not borrow to maximum affordability. If house prices continue to rise as they have over recent months and wages don’t keep pace, headroom will erode and some borrowers may need to temper their expectations or try to negotiate on the price.”