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Stress tests and affordability

ended 04. October 2022

A journalist at The Times is writing a piece specifically looking at whether affordability tests and stress rates are going up for residential and landlord borrowers. He's keen to know if you are seeing any tangible examples of residential borrowers being unable to qualify for the loan they want, or who are even turning deals down because they think the mortgage rates being offered are too high? Are they having to fork out more money for a deposit, or take out a mortgage over a longer term? On the buy-to-let side, with the likes of NatWest introducing new stress rates and drastically capping what you can borrow LTV-wise on the same yielding property, are any landlord clients saying they'll have to put up rents? If so, what will this mean for tenants?

11 responses from the Newspage community

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Craig Fish
Director at Lodestone Mortgages
On the residential side of the market, we are not really seeing much of an impact on mortgage affordability. Most of our clients are already homeowners, and therefore fortunate enough to have a reasonable deposit, comprised mainly of equity in their current property, so they have access to the lower LTV products. As such, their affordability isn't affected, although they are worried that mortgage payments are now a little higher than they were expecting. We recently had one client, who already has a formal mortgage offer in place, attempt to reduce the price they were paying for a property. They weren't successful and were told that the vendor had other offers on the table waiting. We also had another situation recently where we were contacted by our client, whose mortgage application we had already submitted, asking us to cancel their application, as they had been gazumped, over the asking price. The situation on the buy-to-let side of the market is much different. The market is still very active both on purchases and remortgages. We have a client base comprised mainly of professional landlords. Typically, at the sign of a downturn, they will look to release equity from their portfolio in order that they can be ready to snap up bargains they find. They are quickly realising that they may not be able to release as much equity as in previous years due to the increased stress tests being carried out by lenders, and the higher rates now available. Many are commenting that they haven't carried out rent reviews for several years, and that this will now prompt them to do so with a view to them pushing the increased mortgage cost over to their tenants. For those who are looking to get into the buy-to-let market, we are finding that in most cases a 25% deposit is no longer sufficient to meet the stress test calculations that lenders carry out. This is resulting in those people putting off the purchase or looking at alternative options. We suspect that we are now going to see many landlords increasing the rent they charge, which of course is going to have a significant impact on tenants who are already struggling with the increased cost of living. This really is a difficult time for many.
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Riz Malik
Independent Financial Adviser at R3 Wealth
Looking at the current product offering of buy-to-let lenders, I am not sure what is going to happen to the buy-to-let market purchase and refinance market, especially in London & the South. Even if lenders continue to use 5-year fixed rates in their rental calculations, the movement over the last couple of months as well as last week means borrowing 75% loan to value may be a thing of the past. I believe we are going to see an increasing number of buy-to-let mortgage prisoners. Most of the landlords I deal with have said they are planning to increase rents even though they have sympathy for their tenants. This will subsequentially have a knock-on effect for the tenant if the wish to get on the housing ladder themselves.
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Imran Hussain
Director at Harmony Financial Services
The vast majority of lenders have been making adjustments to affordability since the cost of living crisis reared its ugly head out and adjusted what clients can borrow accordingly based on ONS data but for the majority in the residential space, it has not had any major impact. In the past week, we have seen many lenders in the buy-to-let space adjust their stress tests and affordability models, which will require much higher rental incomes to give anywhere near the same loan amount as before and in certain parts of the south, it will pretty much be the death of buy to let due to the stress test changes as the numbers simply don't work.
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Gaurav Shukla
Managing Director at Home Me Mortgages
Since Bank of England announced there would be a relaxation of stress test that lenders needed to use, we’ve seen the opposite due to the state of the markets. Nearly all lenders factor in ONS data to supply household bill averages, and since energy bills have increased a lot, so has cost of living. Therefore, across the board, we’ve seen affordability tests increase as the cost of living has increased. We are now seeing customers who have any form of debt or children, being able to borrow a lot less than they could in May 2022. As of this morning, another mortgage lender has increased their stress test to 7% for first time buyers and 8% for all other buyers. There is a still the general aim to get first time buyers on the property ladder, but it is now becoming a lot harder, and they will need to increase their deposit at a much faster pace than ever before to cover off the new deficit in borrowing power. There are lenders out there which we have access to, who can give a borrowing boosts to first time buyers to help them get on the property ladder sooner, even in this current climate. The buy to let market is also being hit with higher stress tests meaning some landlords are unable to remortgage as the rent they receive isn’t enough to cover the required mortgage cover based on new rates and stress tests. They would also be unable to change the rent as they are in an agreed tenancy with the occupiers. For those who can remortgage, they seem to be passing the increased costs to the tenants, which is why the rental market has seen increases in rent of around 7%. As stress tests and affordability requirements increase, we will continue seeing rent go up for tenants and fewer first time buyers. We may even see people needing to downsize as they may be unable to remortgage if they were already at the edge of their borrowing capacity when they first took out a mortgage. It’s more important now than ever to speak to a mortgage broker to discuss possible options, as there are more and new alternative ways to buy properties.
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Mark Robinson
Managing Director at Albion Forest Mortgages
I have seen numerous people taking a longer term mortgage over the past few weeks to combat rising rates. Of course, it is not all that effective, though, as they pay more interest this way. But it can be a short-term solution. NatWest started a trend and increased their stress test rate for buy-to-let properties, making mortgages for landlords tougher to line up as the rent coming in isn't sufficient. This has the potential to push up rent prices as landlords attempt to combat these changes.
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Rhys Schofield
Brand Director at Peak Mortgages and Protection
Maximum loan amounts reducing has definitely been something we've seen more of over the past few months, as the cost of living and rates increase. In some cases, maximum loan amounts have reduced by tens of thousands of pounds. That being said, there is no need to panic because a broker will have access to many lenders and just because one lender says X amount is the most you'll get, doesn't mean that other lenders won't offer more. It's not uncommon for one high street bank to have a paltry maximum loan that they'd be willing to offer a client but a broker can deliver a higher figure with another lender at a competitive rate. We even had one case where the client's own bank incorrectly declined the loan amount that they needed yet we actually managed to get them the offer with the same lender for the full amount with the help of our relationship manager.
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Michael Webb
Managing Director at Mortgage Republic
Buy-to-let stress testing is becoming stricter across the market place. Many of the stress tests state pay rate plus a percentage, or a set rate, whichever is higher. The pay rate plus, seems to be causing some landlords issues when remortgaging. Conversations with many of our landlord clients over the past week have involved them expressing no choice but to review rents where possible. Many landlords are of the mindset that keeping a good tenant is better than trying to impose large rent increases annually. Better the devil you know, so to speak. As a result, many landlords with long-term tenants have rents that are significantly below the market rate. This is something they will now be forced to address, and the added costs to tenants will start to come into effect over the coming months, adding further to the cost of living crisis we are all experiencing.
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Ricky Dosanjh
Director at Reeds Financial
We have seen a small number of landlords be unable to remortgage, but this is partly because their rental income doesn't fit with lenders' stress tests and that’s even after they have increased rents. Not ideal but we are seeing landlords swallowing any costs for the time being rather than offload properties in a fire-sale. On the other side of this are the tenants, who are potentially paying higher rent as landlords look to secure their own financial futures. We have clients that are currently looking to buy but properties are going as quick as they come onto the market, and the worry for tenants is that they will have to dip into their deposit money if they continue renting and may struggle to replace any monies used if they can’t find a property soon enough.
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Scott Taylor-Barr
Principal Adviser at Barnsdale Financial Management
We are, just this week, starting to receive emails from lenders confirming that they are increasing their stress tests within their residential and buy-to-let affordability calculators. It's too early to see what impact this will have on new borrowers and the maximum loan amounts they can achieve. One interesting development from one lender this week has been to amend their Standard Variable Rate (SVR) depending on the LTV (loan-to-value) of the property - this is something lenders all do on their new business deals, but this is the first time I recall seeing it from a main stream lender on their SVR. Not only is this interesting for those sitting on this rate, it also potentially feeds through to their affordability model; as most lenders stress test rate is their SVR+3%, so the lower the SVR, the lower the stress test rate and so the more you can borrow for any given income.
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Ian Hewett
Founder at The Bearded Mortgage Broker
"Finally, it has happened to me, right in front of my face and I just cannot hide it", sorry if you are now singing this song. I have had my first couple of not sure I want to go ahead at that interest rate conversations today. From previous rates of less than 2% for a BTL (buy to let) mortgage to now being quoted over 4% and with the changes on taxation to landlords, plus the increase on stress test calculations, we are going to see more landlords exit the market. What impact this will have is probably going to shock the rental market to its core. Are the government prepared for this, probably not, are the existing landlords prepared for any more impact on their current stock with a contingency plan, we may be about to find out.
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Ashley Thomas
Director at Magni Finance
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