For existing and prospective buy-to-let landlords, getting a buy-to-let mortgage can sometimes be a stressful experience.
And even though we’re a Maidenhead mortgage broker that manages buy-to-let mortgage applications every day, we recognise that the aptly named buy-to-let stress test can be … well, stressful.
However, our team of Berkshire mortgage advisers feel that there is a reason why applying for a buy-to-let mortgage should become less stressful in 2025.
But first, let’s take a look at how the buy-to-let stress test works.
What is the buy-to-let stress test?
One of the biggest factors that lenders take into account when receiving applications for a residential mortgage is whether or not the applicant can afford to meet the payments.
The same applies to buy-to-let mortgages, of course. However, the interest cover ratio (ICR) – a calculation that lenders use to determine affordability based on gross rental income in relationship to mortgage payments – is more stringent.
In fact, lenders generally want to see an ICR of between 3.5 – 5.5 per cent and a rental cover rate of between 125 – 145 per cent. Put another way, landlords need to be generating between 25 – 45 per cent more than the cost of their mortgage for lenders to be comfortable.
The idea is that risk is reduced if interest rates rise in the future. Additionally, lenders prefer to see a buffer in the event that the property being let is untenanted for a short spell. And, if you fall within the higher tax bracket of earners, then your property will need to earn more rental income (more towards the 45 per cent end of the spectrum) in order for you to pass the test.
But is it time that the buy to let stress test, which is regulated by the Prudential Regulation Authority (PRA), is reviewed? Our team of mortgage brokers in Maidenhead think so. Here’s why.
No stress (or rather less stress)
Now, we’re all for robust regulation when it comes to mortgages, regardless of whether it involves getting a buy to let mortgage or getting a first-time buyer mortgage.
However, whilst the stress test hasn’t changed, there are many external variables that have. For instance, interest rates have fallen – and we expect them to continue falling. This ultimately impacts the buy-to-let stress test by changing the dynamics of the ICR ratio.
As rates come down and buy-to-let mortgage payments become less expensive, it would make sense for the ICR to reduce in scope, too.
Could a sliding scale be adopted so that the rental cover rate continues to reflect the current interest rate landscape by sliding up and down with it? This would make buy-to-let mortgages more accessible when the cost of borrowing is lower, but also make them less accessible when it’s higher. We would argue that a one-size-fits-all approach doesn’t work when the rates are as dynamic as they have been – and certainly if they’re shrinking!
Whilst we can’t influence the PRA at this stage, we can help buy-to-let landlords navigate the buy-to-let stress test and successfully get a buy-to-let mortgage.
Find out how by getting in touch.
Let Alton Mortgages take the stress out of the buy-to-let stress test and find you the best buy-to-let mortgage rates in the UK. Contact our Maidenhead mortgage brokerage on 01628 560820 or email enquiries@altonmortgages.co.uk to arrange an initial mortgage consultation.