If you’re considering investing in property, you must make sure you have surplus income to cover the mortgage regardless of outside factors.
A stress test allows you and the lender to determine the risks and rewards involved when making a buy-to-let investment. Lenders use a buy-to-let stress test to assess whether the property’s rental income will cover the mortgage repayments even if interest rates rise.
Keep reading as we explore what happens in a buy-to-let stress test and how you can prepare for one. Contact Simmonds Mortgage Services today to discuss your buy-to-let investment.
Is a buy-to-let mortgage easy to get?
Buy-to-let mortgages are treated very differently from standard residential mortgages and have additional conditions. You will need to put a larger deposit down, usually a minimum of 25%, and lenders may require you to own your own property first.
Getting a buy-to-let mortgage should be fairly straightforward if you meet the lender’s criteria.
Lenders will also expect a minimum rental income (or rental yield) to ensure the monthly mortgage repayments are met. This is where a buy-to-let stress test comes in.
What is a stress test for a buy-to-let property?
A stress test is a financial assessment that helps lenders identify potential risks involved with buy-to-let mortgages. It takes into account the amount you want to borrow and compares it with the expected rental income of the property and the interest you’ll pay on the loan. The lender will run a number of tests to determine what would happen in the worst-case scenario and the annual rental income needed to cover the mortgage.
But stress tests are not just for lenders. They can also help you, as the borrower, determine whether the property you want to invest in is a good opportunity or if there could be financial risks on the horizon.
How does the stress test work?
Take a look at how lenders assess your affordability with a buy-to-let stress test.
Income cover ratio
Lenders want to evaluate whether the income from your rental property is enough to cover mortgage repayments. They usually expect a rental cover rate between 125% and 145%, meaning your rental income needs to be between 25% and 45% more than the monthly mortgage costs. This is also known as the stressed income cover ratio.
The income cover ratio (ICR) varies depending on your tax bracket.
- Basic rate taxpayers can expect an ICR of around 125%
- Higher-rate taxpayers can expect an ICR of around 145%
- Additional-rate taxpayers could be assessed up to 170%
The higher the stressed interest cover ratio (SICR), the more rental income you’ll need to repay the mortgage.
Interest rate stress testing
The lender will carry out a ‘stress test’ to ensure you can keep up with the mortgage repayments if the interest rate unexpectedly rises. To do this, lenders typically apply a stress test interest rate of around 5.5% to 7%, or somewhat higher than the actual mortgage rate. This is a hypothetical rate applied to your mortgage to determine if you can still keep up with monthly payments.
Does personal affordability affect the stress test?
Although the buy-to-let stress test specifically focuses on the property’s expected rental income, your personal affordability still plays a key role in helping you get approved for the loan. As with most mortgage products, lenders assess your financial situation as a whole. This means you’ll need a clean credit history and a reliable source of income (typically from property rentals), and you’ll need to meet their basic criteria.
Some BTL mortgage lenders may even consider your personal income as well as rental income from the property to boost your overall affordability. This method is known as ‘top slicing’ and may help you access a higher loan amount and find more suitable properties in sought-after areas.
How to pass a mortgage stress test
If you’re thinking about investing in a buy-to-let property, you should make sure you’re prepared for the stress test. But how can you be sure you’ll pass it?
Take a look at what you can do to put yourself in the best position for a buy-to-let stress test.
Choose properties with strong rental yields
The whole point of a stress test is to ensure you can comfortably repay the buy-to-let mortgage regardless of market volatility. Look for properties in areas that have strong rental yields to ensure the rent you charge is competitive and increases over time.
Properties like HMOs (Houses in Multiple Occupation) and MUFBs (Multi-Unit Freehold Blocks) offer impressive rental returns. Unlike standard buy-to-let properties, these properties give you the opportunity to generate multiple streams of rental income from a single property.
Have a higher deposit
Most buy-to-let mortgage lenders require a 25% minimum deposit (some may allow 20%). The higher your deposit, the better your mortgage deal. Putting down more than the minimum expected deposit will give you a lower loan-to-value ratio, which is generally more favourable to lenders as it makes you less of a risk.
Provide accurate documentation
While most lenders are more interested in the property you’re investing in and how much rental income it can make rather than your personal finances, showing you are a reliable borrower with a good credit score will help you improve your chances of getting a buy-to-let mortgage. Make sure you provide accurate financial information about your income, outgoings and any existing debts, such as your own mortgage.
Consult with a mortgage adviser
A specialist buy-to-let mortgage broker like Simmonds Mortgage Services can assess your affordability before you submit a mortgage application. We’ll help you prepare for the stress test requirements – they differ from lender to lender – and find competitive mortgage rates.
What happens if you fail the stress test?
If your property fails the buy-to-let stress test, it doesn’t mean it is completely off the table. Each lender has different stress test requirements, and some lenders are more flexible than others.
Speak to your mortgage broker to find out why you failed the stress test. It can help you be better prepared for future applications. You may be able to make some changes to increase the rental income or put down a larger deposit. In most cases, a good broker will go to another lender with more lenient stress test criteria.
Looking for a buy-to-let mortgage? Speak to Simmonds Mortgage Services
Simmonds Mortgage Services has a professional relationship with buy-to-let lenders across the mortgage market. We’ll be able to help you find competitive deals and prepare for the BTL mortgage application by working out the minimum monthly rental income you need.
Thinking of purchasing property as a limited company? We help with that too.
We handle it all, from mortgage application to approval. Contact us on 01184 693037 or book a meeting today, and let us help you achieve your property investment plans.
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