TMW to increase Stress Testing

TMW to increase Stress Testing

16:12 PM, 17th November 2014, About 9 years ago 2

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The Mortgage Works (TMW) have announced they will increase their standard Stress Testing on all Buy to Let mortgages  that fall between 65% and 75% Loan to Value (LTV) from a Notional rate of 4.99% to 5.49%.stress testing

Stress testing is how a lender calculates the amount you can borrow based on the rental income pcm of the property taken as security. It is normally based on two figures:

1) The Interest cover – this is the percentage the rental income has to exceed the calculated monthly interest of the mortgage

2) The Notional Rate – this is the figure that is used to calculated the monthly interest for Stress Testing purposes. It can be an arbitrary figure such as in this case 5.49% or it can just be the pay rate (actual interest rate of the mortgage)

At the old notional rate of 4.99% for every £1 of rental income per month you could borrow a maximum of £192.38. With the new higher figure this falls to £174.86 per £1 rental income per month.

The Notional rate will remain 4.99% for all loans up to 65% LTV then increase to 5.49% up to 75% LTV and finally 5.99% above this to the maximum 80% LTV.

TMW have introduced this new Stress Testing rate to “strengthening landlords’ ability to withstand future base rate rises”, but is confident that the majority of its customers will be unaffected by the change.

Henry Jordan TMW MD said “as a responsible lender we continually review our criteria and these changes are intended to give an extra measure of protection to our customers. Tiering stress rates by LTV ensures alignment to our pricing structure and reflects the likely options available to landlords when their existing product matures.”

This is an unusual extra tier for a lender to use, complicating matters further for the general public.

TMW rates start at 2.64% 2 year fixed and 2.39% Tracker both Maximum 60% LTV and go up to 5.29% fixed maximum 80% LTV.

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Mark Alexander - Founder of Property118

16:26 PM, 17th November 2014, About 9 years ago

I think this is a step in the right direction for the industry generally and whilst this level of stress testing will offer more protection to TMW, I still don't think it is robust enough for most BTL borroweers unless thay have significant surplus income.

This is how I stress test:-

Monthly rent X 12 = annual rent.

I then reduce the annual rent by 35% for leaseholds and 25% for freeholds to allow for typical costs of insurance, ground rent, service charges, maintenance, rental voids, letting and management costs.

I then divide what is left by 7% (my own preferred "notional rate") to establish what I believe is a safe level of maximum borrowing.

NOTE:- unless you are using a scientific calculator divide by 7% (or your chosen stress test figure) will not work. An alternative is to divide by your stress test figure and multiply by 100.

The above should ensure that you will continue to make a profit until such time as your mortgage rate exceeds your stress test figure, Break-even occurs when interest rates hit your stress test figure.

Neil Patterson

16:30 PM, 17th November 2014, About 9 years ago

Nice and conservative Mark 🙂

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