How to deal with Lender Buy to Let Rental Stress Test Rules in this market.
This article is part of a mini-series covering the emergering trends in the UK Buy to Let mortgage market and discuss how they might play out in the coming months, and provides possible solutions to combat the challenges that lie ahead including how to deal with the Buy to Let Rental Stress Test problems as Buy to let Mortgage Rates increase.
Rental calculations – Buy to Let Rental Stress
Since the Prudential Regulatory Authorithy (PRA) review in 2016 the regulated Buy-to-let Lenders in the UK have been guided towards an interest rate stress test of at least 5.50% with some tolerance on long term fixed rates. When these rules were being draw together the Bank England Base Rate stood at 0.25% to 0.50%. This pivotal financial benchmark, also known as the Repo rate, now stands at 1.75% (at August 2022).
Why does this matter? Well Buy to Let lenders monitor the Repo rate closely when setting their variable rates and often mirror changes. In a rising market we are now seeing the underlying rates of major Buy to Let Lenders surpassing the 5.50% stress rate – the buffer designed to cater for rate rises in the market. So why has everyone seemingly been caught out? Well it’s been speed of the Repo rate increases and with inflation raging it is expected to go higher.
I’m convinced the PRA will be looking to send out fresh guidance as Private Rental Sector needs to function in a sustained way otherwise more tenants will become a burden on the State. However I suspect their intrays is over-flowing at the moment with wider economic concerns. So its up to the individual Buy to Let Lenders to jump first rather than wait to be pushed.
So how does this impact Landlords? Put simply the formula to assess mortgage affordability will be returning a lower borrowing amount. To maintain at equilibrium they will either have to increase rents or downpay the mortgage balance at the point of remortgaging otherwise drift along on a high variable which will eat into their profit margin.
POTENTIAL SOLUTIONS TO DEAL WITH BUY TO LET STRESS TEST RULES
Buy to Let Product Transfers may provide the solution for existing customers who can generally switch rates without being held to rental stress testing. However do expect these product offers to climb in price as effectively there is likely to be an increased captive audience and as the risk of default is on paper more likely than they initial underwriting factored in. Importantly this restbite is not a facility offered by all Buy to Let Lenders especially the “Specialist Sector”.
Alternatively seek out professional Mortgage Advice to select a Buy- to Let Solution which challenges the rental assessment formula in other areas of the equation. Examples include:
* 100% rental coverage factors on background portfolios rather than 125%, 140% or 145% i.e. just making sure the portfolio is self-funding.
* Lenders that default to the lower tax payer even when the joint applicant is in a higher rate tax bracket.
* Lenders that go by property profit declared on self assessment returns rather than an aggregate of gross rents when determining which tax bracket to apply.
* Lenders that work on the payrate of the product rather than the stress test rate.