Buy To Let Lending Stress Test

Buy To Let Lending Stress Test.

The introduction of the Mortgage Market Review Rules back in April this year changed the market dramatically.

Mortgage brokers and mortgage lenders required to ensure all mortgage applications were suitable and affordable for a borrower.  Not just affordable today but affordable if interest rates rise, in most cases lenders applying mortgage affordability stress tests of an interest rate increase of 3-4%.

This has changed the residential mortgage market with a slowdown after that last 4-5 years of recovery.

Until now, the buy to let mortgage market had remained unscathed with many lenders basing “affordability” on the rental  cover.  In simple terms, this means that for many buy to let purchases, the rent potential must cover the interest payments by around 125%.  This resulted usually in higher deposits, to keep interest payments down but the borrower has then not had their personal income, expenses and affordability tested.

Stress Test on Buy to Let

Nationwide’s buy to let lending arm, The Mortgage Works (TMW) has this week introduced a stress test interest rate on buy to let mortgages of 5.49% on loan to values of 65% to 75%.   Stress rate tests remain unchanged for longer term fixed rate deals of 5 years at 4.99% and 125% rental cover.  What this means is that any buy to let deal with shorter term fixed rates or discount rates or tracker rates will have to pass the higher interest rate stress test.

We see this as a sensible move by TMW to encourage larger deposits where lower or more flexible interest rate deals are used to protect both the lender and the borrower from any “toxic debt” risk if property prices or rental yields fall or interest rates rise.