Santander is updating its mortgage affordability calculations to reflect the cut to National Insurance (NI) on employees’ pay.
The main rate of NI contributions was reduced on Saturday (6 January) from 12% to 10%, a move which amounts to a tax cut worth up to £754 per person or over £1,500 for working couples.
According to calculations by AJ Bell, this would mean a boost of £14.50 weekly.
Now Santander has confirmed the additional income in people’s pockets is to be taken account when it calculates borrowers’ affordability.
Whilst a tweak to affordability might not look as impactful as reducing the price of a mortgage, it can actually make a difference to would-be borrowers.
David Hollingworth, associate director at L&C Mortgages, explained: “It’s good news to see Santander being so quick to implement changes to their affordability model.
“It makes sense that if homebuyers and owners will have a little more disposable income as a result of the NI cut, it should give a little more room for a mortgage lender to potentially agree a slightly bigger borrowing.”
According to Hollingworth the cost-of-living increases and interest rate hikes have made a difference to affordability assessments over the last couple of years, putting additional pressure on the amount lenders can offer borrowers.
He added: “Therefore when costs do come down it follows that lenders should be making moves like this to improve what they may be able to lend.”
Will more lenders take the NI cuts into account?
The move comes following a spate of interest rate cuts which saw some lenders reducing rates to below 4% and average mortgage rates fall this week to their lowest since June 2023.
Today Santander said it would be making more cuts, with one mortgage – it’s five-year fix for those remortgaging with 40% equity – was now 3.89%.
With the rate cuts, where one lender makes a move, others follow. So, will the same happen with the NI cut and affordability assessments?
Hollingworth thought it would. “Others will no doubt be factoring changes like this in which a relatively small shift could help turn the dial a little in favour of borrowers,” he said.
“We’ve also seen lenders looking at how they can alter the approach to the stress rates that they apply. Higher interest rates mean higher stress rates but some lenders have sought to be more flexible where they can.”
Stress tests are part of the affordability assessment process and involve lenders checking whether a potential borrower could afford the mortgage in more difficult circumstances.
According to Hollingworth Santander has also shifted to a lower reversionary rate – this is the rate to which your mortgage defaults when your deal ends. Meanwhile, TSB introduced first-time buyer deals with a lower revert rate to give lower stress rates – a definite boost for those taking their first steps on the property ladder.
Hollingworth added: “With affordability an ongoing hurdle for buyers in particular lenders will need to continue adapting to improve and be as flexible as possible to enhance the borrowing amounts where it’s appropriate.”
More about the NI cut
The NI cut was announced in the Chancellor’s Autumn Statement and came into effect on Saturday 6 January.
Laura Suter, director of personal finance at AJ Bell, explained people will see the effect of the cut on their income when they receive their next pay cheque.
Indeed, employed people don’t have to do anything to claim the money – your company’s payroll department will have made the change for you.
Suter added: “But employees should take an eagle eye to their next payslip to make sure the change has been made.”
Whilst it means up to an additional £14.50 a week, Suter still described the impact of this cut on our finances as ‘slight’.
“Sadly” she said, “the difference for most is not enough to get too excited about – or even to compensate for recent rising prices – but the timing will give a small boost to people’s budgets just as the bills from Christmas land.”
She added: “The cut to National Insurance is not enough to compensate for the government’s decision to freeze income tax thresholds.
“The big brother to National Insurance, income tax is charged on incomes at a much higher rate and, rather than being cut, it has increased by stealth in recent years.
“This, coupled with sky-high inflation in recent years, means that many people are still looking down the barrel of a real terms pay cut over the past few years, even with this National Insurance change today.”
