A stress test is the term given to the process by which lenders assess the sustainable affordability of a loan to a buyer. Required by law to undertake such affordability tests as a result of legislation following the 2008 credit crunch and housing crisis, stress tests are there to protect the borrower (and the lender) for entering into ill-conceived or risky mortgage arrangements.

The standard mortgage stress test will consider household income, monthly outgoings, number of incomes in the household and the likely impact on affordability of rises in interest rates, etc. The buy to let borrower is usually relying in large part on income derived from the letting of the property and so a buy to let stress test will usually focus on the rent receivable and the interest payable.

In the past, a standard buy to let stress test has required that rent received be 125%, thus allowing a margin for additional costs and to build a buffer in the event that the property becomes vacant for a short period of time. In addition, a notional rate of interest will be assumed (higher than the existing rate) so as to allow for a cushion in the event that interest rates rise in the future.

In large part due to recent changes in the tax structures applied to buy to let income, lenders in this market have been keen to revise their stress tests to take account for the additional cash flow burden put upon the high rate tax payer with a buy-to-let mortgage and the increased likelihood that mortgage rates will increase in the future.

Some lenders have already increased their stress test margin to 145% rental cover and 5.5% notional interest rate, thus effectively reducing loan to value and limiting an investor’s buying power.

The good news is that, at present, borrowers financing their buy to lets through limited companies will not be hit by the Government’s new tax rules. Therefore, lenders are not necessarily bringing the increased stress test across to their corporate mortgage rates.

To speak to a mortgage adviser contact us on 01628 507477.

Download our Free First Time Buyers Guide

Recent posts

Selling up? It’s important to make your house as appealing as possible to potential buyers. Good decorating can help with first impressions, and increase the perceived value of your property.

With the cost of living affecting so many of us, we have made a list of budget-friendly activities and ideas for you.

Moving soon? It's never too early to get organised! Be prepared and avoid unwanted stress by checking out our list of tips to get you ready for moving day.

Inflation simply put, is the increase in the price of something over time. The Office for National Statistics (ONS) tracks the prices of hundreds of everyday items and these items are updated to reflect shopping trends.

We are often asked if it's good advice to consolidate “unsecured” debt (credit cards and loans etc) into your mortgage, the answer is, sometimes

When you’re looking to buy a home, and you own a car, you ideally want to know the rules on parking in the area. Parking rules can be confusing, even for the most experienced of drivers! This is why we have written this blog to help you.

There are several potential sources you can consider when it comes to getting together a deposit to buy a property. Providing proof of the source of your deposit is a key requirement in the application process and will need to be given to both the lender and the solicitor.