Buy-to-let affordability assessment stress tests and calculations have got extremely strict in comparison to where they were last year. Lenders have had to restrict their generosity with affordability assessments and increase their requirements at affordability stage due to interest rate rises. Lenders have become more cautious of borrowers in general, and buy-to-let investors are having to provide larger deposits and prove that they can afford loans at a higher level, to ensure that lenders won’t lose money.
General Buy-To-Let Affordability Assessment Criteria
With most rental mortgage affordability checks, lenders will check the following:
- How much deposit is being contributed by the borrower. Most buy-to-let lenders will need at least 20% deposit but others will need 25% or more. This ensures that the borrower has the ability to manage their money and can invest a large stake of their own money into the property. Rather than relying completely on the bank. Often, the larger the deposit, the better interest rate deal and product.
- How much rental income is being/going to be received. Most buy-to-let lenders will want to know how much rent will be received (if the property is yet to be rented out) or how much is being received already (in remortgage cases). They will normally want to rent to cover at least 145% of the projected monthly mortgage payment at 5.5% interest.
- How much you earn and your tax threshold. Some lenders are not concerned at all about how much you earn personally and are more focused on the income from the rental property. But, some lenders will insist that you earn a minimum income yourself and will determine how much they are willing to lend you based on this and also your tax rate.
Barclays Changes To Buy-To-Let Affordability Assessment
In a message to brokers this morning, Barclays sent an update on how they will be assessing buy-to-let affordability moving forward. Position as a positive improvement, Barclays have said the following:
From Thursday the 4th of May, borrowers who currently own or part own a UK residential owner occupied property, applying for a Buy to Let mortgage of £1m or below, will initially be assessed on an Interest Coverage Ratio (ICR). The assessment will consider the client’s income tax band and apply a background stressed monthly mortgage payment.
The minimum income for all buy-to-lets remains at £25,000 and ICR assessment will not be considered on applications for portfolio landlords (who will hold four or more BTL mortgages upon completion) or any applications where rental income from an applicant’s background properties doesn’t cover 100% of the respective mortgage payments.
What Does This Mean Exactly, And Is It a Good Thing?
This essentially means that Barclays will be applying a further affordability stress test to all their assessments, based specifically on a hypothetical monthly mortgage payment. Calculated by how much you earn and the tax band that you fall under. Although not specified, it implies that people who are higher rate tax payers will have their income and affordability tested at a higher monthly mortgage stress rate and people who are on a lower tax rate will have their affordability tested on a lower monthly mortgage hypothetical payment.
The positive side to this is that there should be more fair assessments of income based on tax and disposable income. However because Barclays have not specified exactly what these background stressed monthly mortgage payments will be, there is the risk of affordability calculations becoming even less generous and more stringent.
What Do Mortgage Advisors Say?
Senior mortgage and protection advisor at Oportfolio Jade Pinkerton had this to say about Barclay’s recent news.
“This last week or so, a couple of the buy-to-let lenders have slightly reduced the stress tests (but they are still much more restrictive than they were previously). However, Barclays seem to have gone the other way. In our opinion, they are trying to promote the new changes as a positive, but ultimately, Barclays used to be a very generous lender for BTL clients who have good income – due to the way they would consider overall affordability and income as well as rent. For a lot of high-rate tax paying clients, Barclays were a good lender to secure a larger loan size for a buy-to-let. But now they are much more restrictive. I have tried Barclays newly updated buy-to-let stress test calculator for a case recently, and the client couldn’t get what they needed, despite it easily being affordable for them.”
Bank of Ireland Improve Buy-To-Let Rates
In other more positive news, Bank of Ireland have announced that they will be reducing and improving their own buy-to-let product offerings meaning that despite all signals pointing toward a base rate increase this week, Bank of Ireland are still dropping their rates. Here is a breakdown of some of the major product changes.
2-year fixed products:
Current product rate of 4.73% is being replaced with a rate of 4.69%. This comes with a £1,995 fee.
Current product rate of 5.01% is being replaced with a rate of 4.80%. This comes with a £1,495 fee.
5-year fixed products:
Current product rate of 4.58% is being replaced with a rate of 4.47%. This comes with a £1,995 fee.
Current product rate of 4.72% is being replaced with a rate of 4.52%. This comes with a £1,495 fee.
2-year fixed products:
Current product rate of 4.96% is being replaced with a rate of 4.75%. This comes with a £1,995 fee.
Current product rate of 5.15% is being replaced with a rate of 4.85%. This comes with a £1,495 fee.
5-year fixed products:
Current product rate of 4.68% is being replaced with a rate of 4.50%. This comes with a £1,995 fee.
Current product rate of 4.76% is being replaced with a rate of 4.56%. This comes with a £1,495 fee.
Speak To a Mortgage Professional If You Are Looking For a Buy To Let Mortgage
Call our specialist buy to let mortgage brokers today if you want to talk about getting a new mortgage. We are here to help.