Rental Stress Tests
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Understanding buy-to-let rental stress tests
Rental Stress testing is used by all lenders to assess your suitability for a mortgage product. Given the current economic climate, lenders understandably want to check that you can comfortably afford the monthly payments, keeping in mind all of your other expenses plus an added margin for risk.
Knowing how this ‘stressed’ test is calculated means that you can better understand the potential for your portfolio and how much you can borrow on a given property.
Lenders generally use two major metrics to calculate your affordability for a buy to let (BTL) mortgage:
- Interest Cover Ratio (ICR) – simply your ability to repay the interest on your mortgage
- Rental Cover Rate – the minimum rental income needed for the property.
Typically buy to let lenders look for an ICR of between 3.5%-5.5% and a Rental Cover Rate of between 125%-145%. That being said, this will depend on a lot of factors plus with our lender access and expertise we may be able to help you secure a mortgage that is outside of these calculations, depending on your portfolio.
How to calculate Rental Stress Testing
We’re all unique and the same can be said about your financial potential, this is why we believe no one-click calculator can give you a definitive score for your borrowing potential.
But we appreciate that you may just be looking for a ballpark figure right now, so to give you a rough idea, you can calculate the approx rental interest that you will need using this formula:
Loan amount x ICR (5.5%) = Annual Interest
So, for example, to put that into numbers, for a loan amount of £350,000, you will need an Annual Interest of £19,250.
Knowing the Annual Interest also allows you to calculate the minimum Annual Rental Income that the lender might expect. You can calculate this with this formula:
Annual Interest x Rental Cover Rate (145%) = Minimum Annual Rental Income
Using the previous example of £350,000, this means your property would need a Minimum Annual Rental Income of £27,912.50 – approx £2326 a month.
It is widely known that Rental Stress Tests have been under much scrutiny by The Bank of England’s Prudential Regulation Authority (PRA) over the last few years, BUT our mortgage advisers can give your the latest deals tailored to your personal portfolio.
PRA Changes to Stress Testing
Rental Stress Tests have not always been this way, historically lenders were able to be a lot more flexible with their individual thresholds but due to the PRA regulation changes, introduced in 2017, and of course the harsher tax environment for personally geared landlords, lenders are now more cautious, therefore it is even more important to have expertise on your side.
What’s more, due to the stricter PRA regulations, mortgage lenders also now take into consideration your tax when assessing mortgage affordability.
What can landlords do about rental stress testing?
As part of our pre-submission due diligence, we will always assess your mortgage affordability and ICR calculations BEFORE applying for your mortgage to ensure that it fits with the lender’s individual criteria, this saves you time, money and the potential for a dreaded decline.
But if the investment that you are considering doesn’t meet the standard threshold, it doesn’t automatically mean that your mortgage application will be refused. Here’s where we come in.
Personalised Mortgage Expertise
At Your Fingertips
As experts in buy to let, we can help you navigate all stress test requirements and answer any buring questions you may still have. To check your eligibility or to discuss your options, get in touch today by calling 08009499410 or by requesting a callback here.
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