BTL Stress testing – increased affordability rates?

by Readers Question

4 years ago

BTL Stress testing – increased affordability rates?

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BTL Stress testing – increased affordability rates?

I found out yesterday that Woolwich have now started using a reference rate of 5.79% at 125% in their rental calculations. They seemed the last of the lot in this regard after BM stopped using the pay rate last year.

I’ve only been in the BTL game for a couple of years now, and wanted to hear views on this. I’m trying to think about who I’ll be remortgaging to in the next 18 months or so, if every lender will demand higher required rents in their calculation.

Would it be better to reduce outstanding debt in the next year or so, or are things likely to change?

Many thanks

Samstresstesting

Comments

Neil Patterson

4 years ago

Hi Sam,

Don't Panic !

Woolwich are only one high street lender and most of the best Buy to Let lenders are not normally found on the high street.

I monitor the BTL market constantly and there has really been very little change in the last year in terms of rates and stress testing overall.

Many lenders stress test at a notional 5% which with today's rent price ratio is normally more than enough at 75% LTV.

However you can do a search on our Buy to Let quote engine which will not only tell you which lenders and products will lend the amount you require but also the maximum you could borrow.

Please see >> http://www.property118.com/buy-to-let-mortgage-calculator-2/

Mark Alexander

4 years ago

Hi Sam

My thoughts on paying down loans are well documented in the advice section of this website. I particularly recommend that you read one particular article if you don't have time to read them all - see >>> http://www.property118.com/interest-only-vs-repayment-mortgages/

I also concur with Neil Patterson's comments 🙂
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Some One

4 years ago

If a stress test of 5.79% might cause you problems are you investing in the right properties?

My rule of thumb is gross yield should be at least 6%, and I like to go for 60% LTV to get better rates. OK that limits the size of the portfolio, but does make me feel fairly relaxed about things

Mark Alexander

4 years ago

Reply to the comment left by "Some One" at "23/05/2014 - 11:05":

I'm sure your comment is well intentioned and your strategy might well be the right one for you. However, I don't think one size fits all.

For example, at one point in my career I had significant surplus cashlow from my Financial Services business and whilst I put a lot of money into pension schemes I also have a passion for property and its growth prospects. At that time I felt it was right to gear highly and to support negative cashflow. It was a case of speculating to accumulate.

That strategy paid off for me as it gave me substantial losses to offset rental profits when interest rates tumbled and I also benefited from significant capital appreciation which would otherwise have been restricted if I hadn't geared up to highly.

I hedged my bets in many ways at the time, i.e. a significant liquidity fund equal to 20% of debt and positive cashflow as well.

Fortunately those were the days when lending criteria were also far more related and 90% LTV and 100% rent to loan interest were also widely available. The year I am talking about of course are 2003 and 2004 - oh they were happy days. I still have several tracker rate mortgages costing less than 2% 🙂
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LVW4

4 years ago

It seems the problem is that most lenders use 'automated' underwriting, which takes no account of a borrower's full financial situation. If they don't like what Experian says, no mortgage! However, I am currently talking to The Holmesdale Building Society, who use 'proper' underwriting, albeit it takes longer. This should produce a better result for all concerned.

Mark Alexander

4 years ago

Reply to the comment left by "Lou Valdini" at "23/05/2014 - 11:30":

Hi Lou

Again it's horses for courses. Automated underwriting has it's advantages too, i.e. professing is more cost effective and this can and often does flow into product pricing.

Landlords cannot possibly know all of the mortgage products and the basis upon which lenders underwrite mortgages unless their full time career is that of a mortgage broker. For that reason I always recommend using a broker, and preferably one who is also a landlord and specialises in arranging BTL mortgages.
.

John Corey

4 years ago

Sam,

Just because a lender will offer a particular LTV does not mean it is right for you. More so when we look at how lenders went under with loan books that were over leveraged.

If you want to refinance in 18 months all sort of things can happen that will stop you cold. Best to have a plan that includes not remortgaging as that might be your only plan at the time. Your credit score, the LTV, the lender's business decisions and the overall market sentiment are just some of the things that can impact a future decision.

Leverage is a double edged sword. It can work for you when values are rising or kill you if values fall. Somewhat similar to interest rates. If you have a lot of debt and can not keep up with the payments, the hard work building the portfolio is wiped out and you face ruin.

People have done well in the past by betting on rising prices. Were they good or just really lucky? If house prices tend to track inflation long term, past periods of over 10% inflation would help drive up house prices. If we have a low inflation environment, the value may not rise so fast. Then there is the real demand vs. supply. In other words, be careful about speculating on future rises and gearing to a high level. Better to focus on the cash flow and let any rise in value be icing on the cake.

BTW, the test rate is what the BoE is encouraging. It is not an isolated decision by one division of one bank. What the test rate should be can vary so there is no one rate that all banks will use.

Sam C

4 years ago

John

Thanks for you comments guys. I'm confident in my overall investment strategy, and my recent additions have been higher yielding properties that will to an extent buffer any future interest rate rises. Overall, I know that a lot of things can happen in the interim, and I always endeavour to keeps credit history sparkling for that reason.

With regard to the BOE; they have in effect adopted a much more Federal Reserve type approach in recent years, and don't just claim to adhere to their historic principle of solely attempting affect inflation through interest rates. They have spoken about employment figures, which would have been a rare consideration, when looking at the BOE historically. My portfolio is entirely in London, and on that front demand is solid. If you monitor sewage flows in many parts if London, it tells you something about the actual number of people living in a locality as opposed to what a census measures. These figures are constantly rising, so demand is inevitably going to rise and as such, I think the supply and demand side if things had the predominant effect in London and the south east at least.

Of course, there are other risks; the Thames barrier might fail, or an asteroid might land in Piccadilly Circus, but these are risks that no one can predict.

Right now, I'm only going to utilise leverage on high yielding properties for the next few years, allowing rents to inflate. I was more concerned with if I should pay down some of the debt now, to make the numbers work at a reference rate of say 5%, or is it still likely that products using the pay rate might still come back, based on knowledge if the industry.

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