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A mortgage ‘stress test’ revolves around predicting future ‘affordability’ of the mortgage being taken out.
It is seen by many borrowers as just another hurdle to overcome when looking to raise a large amount of finance on their properties, but it’s important to understand how you can maximise the level of finance available depending on the products available in the market.
How can you maximise the level of borrowing available while still keeping the deal affordable?
A buy-to-let mortgage stress test is applied to a mortgage application on the rental income generated from the subject property to check the borrower’s ability to repay their mortgage at a given interest rate, even if the actual rate you are paying is lower.
When measuring affordability for buy-to-let mortgages, lenders will also require a ‘buffer’ on the rental income, which is usually calculated at 125% for Ltd companies and basic rate taxpayers, right up to 145% for additional rate taxpayers. This is done to ensure a borrower has enough surplus income from the property to pay for repairs, rent arrears & other eventualities relating to property management.
Following on from the above, the three key components to raising the largest mortgage loan possible depend on:
1. The ownership of the property
2. How long the mortgage product is fixed for (variable rate, 2-year fix, 5-year fix, etc)
3. What the annual rental income is for the property
Typically, you can raise a larger mortgage loan if you select a 5-year fixed product because lenders calculate the borrowing based off the actual interest rate being charged. Variable and 2-year fixed rates are often calculated at a figure that can be anything between 1-2% higher than the interest rate on the product. Please see examples of this below.
Examples of how BTL Mortgage Stress Tests are calculated
The client is looking to buy a property in their Ltd company, worth £600,000 and the rental income is £2,500 a month.
|
Product |
Rate | Stress Rate |
Maximum Loan Available |
|
2-year fixed |
5.39% |
7.39% |
Annual rent = £30,000 divided by 125% (due to them purchasing in a Ltd company) = £24,000
Divide this by the stress rate 7.39% = £324,763 Max Loan |
|
5-year fixed |
5.5% |
5.5% |
Annual rent = £30,000 divided by 125% (due to them purchasing in a Ltd company) = £24,000
Divide this by the stress rate 5.5% = £436,363 Max Loan |
You can see by just picking a 5-year product, as opposed to a 2-year product, you could raise circa £111,000 more.
As mentioned, the ownership of the property will also have an effect on the loan size available. See below how the figures would differ for the same example if the client was purchasing the property in their personal name and they were an additional rate taxpayer:
|
Product |
Rate | Stress Rate |
Maximum Loan Available |
|
2-year fixed |
5.39% |
7.39% |
Annual rent = £30,000 divided by 145% (due to them purchasing in their personal name and them being an additional rate taxpayer) = £20,689
Divide this by the stress rate 7.39% = £279,968 Max Loan |
|
5-year fixed |
5.5% |
5.5% |
Annual rent = £30,000 divided by 145% (due to them purchasing in their personal name and them being an additional rate taxpayer) = £20,689
Divide this by the stress rate 5.5% = £376,175 Max Loan |
Overall, you can see by purchasing the property in a Ltd company allows the client to raise £44,795 more on a 2-year deal and £60,188 more on a 5-year deal.
Some lenders have higher arrangement fees so that they can offer a cheaper rate, to allow for a higher mortgage loan to be granted. Typically you will be able to borrow more when the product selected is a 5-year fix as more often than not, the stress rate will be the exact same as the interest rate.
How can Advocate Finance help?
Whether you’re looking to raise more capital on a property you already own, trying to purchase a new investment with as little deposit needed as possible, or you are simply just trying to complete a pound-for-pound remortgage due to your current rate expiring; we will be able to assist to ensure you are placed with a mortgage lender with the relevant affordability criteria to meet your needs.
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