Private Finance's Mortgage Memo - 12th May 2022
is our take on what is currently happening in the mortgage market. Our views
are often cited in several national publications, including; BBC News, The
Times, Telegraph, City AM, FT Adviser and Daily Mail, as well as a number of
key trade publications, so this should keep you ahead of the curve. If you have
any questions on any of these stories, or would like further information,
please do not hesitate to get in touch.
- The existential threat to landlords in the changing interest rate environment: What does increased stress testing mean for BTL borrowers?
- Nationwide increase LTI to 6.5 x on like-for-like remortgages
The existential threat to landlords in the changing interest rate environment: What does increased stress testing mean for BTL borrowers?
Two major lenders, Metro and Santander, have recently increased their stress test on BTL lending, reducing potential borrowing for some. We suspect as specialist lenders increase rates their stress tests will automatically increase too. For context, the classic higher rate taxpayer stress test is 145% cover at 5.5% interest stress and somewhere between 4% and 5% stress on a 5-year mortgage. Typical lower rate taxpayer or LTD company stress rate is 125% at 5.5% on a 2-year fixed or somewhere between 4 and 5% stress on a 5-year fixed. Then there are specialist lenders, who can stress at the pay rate on a 5-year fixed (so for example a 3.25% mortgage rate, they’ll stress at that level still with the 145 or 125% cover) which allows for significantly larger amounts of borrowing, but of course comes at the sacrifice of rates.
- The rate increases we have seen in the residential market have not always been reflected in the buy to let market and there are still some incredibly good BTL rates available at the moment which is positive for landlords. The issue that landlords could face is two-fold, if interest rates continue to increase and a landlord needs to refinance their BTL in say a years time often they are forced to borrow on a 5-year fixed rate if wanting to utilise as much gearing as possible, and so could be forced on to a new 5-year deal at higher rates without option for 2-year fixed, so not just a short term decrease in their profitability, but a longer term one.
- The other side to this is, if specialist lenders increase rates, their stress rates will also change with this so some landlords could find themselves unable to borrow as much as previously available to them and end up on a high lender SVR rate or potentially being forced to pay down the loan if they have the funds to do so.
- As market conditions change however, lenders continue to try and encourage borrowers not through rates, but through criteria change which will dampen the impact of higher stress testing. However, this may not be enough to help some borrowers. Lenders have been increasing the LTV at which they will lend at and increasing maximum loan sizes in this space, critical changes given the state of the property market. Another change is happening, with Newcastle being the latest lender to remove the minimum income requirement for BTL borrowers. This change means borrowers affordability is purely assessed on the Interest Coverage Ratio (ICR), in other words the rent generated on the property itself. Consequently, it makes BTL products far more accessible, with borrowers simply needing to have a deposit to invest.
Nationwide increase LTI to 6.5 x on like-for-like remortgages
This criteria change from Nationwide could provide a lifeline to some borrowers, particularly those whose income may have decreased since taking out their initial mortgage loan. 6.5 x is a significant increase with 5.5 x being relatively rare amongst mainstream lenders and 4.5 to 5 being the usual level.
- A like-for-like remortgage is a low risk lending proposition which enables the lender to extend the LTI to this level.
- This could significantly extend borrowing capability, with a borrower on a £50k income now able to borrow up to £325k compared to £237,500 at the standard 4.75 x income.
- This is a very welcome change and could be a lifeline to some borrowers who are either mortgage prisoners or had a recent significant reduction in income.