Tightening stress tests will leave BTL ‘dead in the water’

Tightening stress tests will leave BTL ‘dead in the water’

Mortgage brokers have expressed shock as lenders tighten their stress testing for buy-to-let investors in response to turbulence in the UK government bond market. 

The mortgage market was plunged into chaos last week following chancellor Kwasi Kwarteng’s “mini” Budget which sent gilt yields soaring and led to hundreds of products being pulled from the market. 

At the beginning of September, there were 2,075 buy-to-let products available on the market, but as of October 4 there were only 1,057, according to Money Facts.

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Lenders have begun returning products to the market this week, but brokers say there is no respite in sight yet. 

Yesterday (October 5) The Mortgage Works began applying a minimum stress rate of 8.49 per cent on all new buy-to-let applications as an interim measure, up from 5 per cent previously. 

The move follows stress test hikes by a number of other lenders, including Natwest and TSB, and represents the highest stress test currently on the high street market.

A stress test is applied to a mortgage borrower’s application to check the borrower’s ability to repay their mortgage at a given interest rate, even if the actual current rate is lower. 

When measuring affordability for buy-to-let mortgages, lenders will also require a ‘buffer’ in rental income, usually at 125 or 145 per cent.

This is done to ensure a borrower has enough surplus income from the property to pay for repairs, non-payment of rent and other eventualities like service charges.

But brokers say higher stress tests will make buy-to-let unviable.

Nottingham-based adviser at Harmony Financial Services, Imran Hussain said stress test rates will have to come down in the coming weeks, otherwise they will be “the death of buy-to-let”. 

At a rate of 8.49 per cent, a basic rate tax payer borrowing £100,000 would need to be taking in a minimum of £885 rent per month. 

With average rents in the Midlands of between £600 and £800, it means landlords face the choice of either upping rents significantly or choosing to sell. 

The outlook is even worse in London, where yields are lower and rents are already sky high.

“Around Harrow in London, the previous rates were already affecting the affordability,” adviser Jiten Varsani told FTAdviser.

“This is of course going to have huge impacts for those landlords looking to buy. It will also restrict those looking to remortgage as they may no longer be eligible thus reverting to product transfers or switches.”

Landlords feel the effects

West Yorkshire Money, managing director, Adele Forbes is one such landlord who is feeling the effect of the rate rises and stricter-criteria landscape. 

Forbes, herself a mortgage broker, has a buy-to-let property in Chester that she is considering refinancing. 

The property needs work done to it but Forbes is hesitant to increase the rent on the property to cover this.