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
Reasons to get a Buy to Let Mortgage
Yesterday
Following recent changes in the Buy to Let market, some investors may find this product less appealing. However, if done correctly, building a buy to let portfolio can be very profitable.
Stamp duty: how is it changing in 2025?
14 days ago
Helping you understand the upcoming changes in stamp duty (SDLT) from April 2025.
UK homebuyers and homeowners are hoping for stability in 2025.
We are hoping that mortgage rates will ease this year, but how drastically depends on inflation trends, swap rates, and the Bank of England’s decisions in which way the base rate should go.
Budgeting over the Christmas Period
3 Dec 2024
The most wonderful time of the year can easily turn into the most expensive time of the year. Watching the pennies doesn’t mean that the Christmas festivities have to stop, following a few budgeting tips can mean you still have a special Christmas and don’t go into the new year in debt.
Preparing your home to sell in winter
29 Nov 2024
December is usually a less desirable time to buy as many people don’t want to move over the holidays. However, prospective buyers do start to look at this time. Selling your home in winter may require a bit of extra attention to showcase your property at its best.
We look at why mortgage rates increased following the Bank of England's choice to reduce the bank rate, and should you fix now?
UK 2024 Autumn Budget: Housing
30 Oct 2024
On 30th October 2024 the Chancellor, Rachel Reeves delivered the Autumn budget which we had previously been warned would be “difficult”. Below we have summarised the main housing points.
Talking about money with kids
23 Oct 2024
In an increasingly cashless society, money is an intangible concept for children to grasp. In the days of coins and notes, kids could see money as something physical you require to purchase goods and services.
In order to help teach your children about money, we have listed some tips below;
More information
Trusted by
