What Landlords Need to Know About Stress Testing for Mortgages!

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What Landlords Need to Know About Stress Testing for mortgages!


  • What is the difference between Loan To Income (LTI) and Loan To Value (LTV)?
  • What changes in Financial Conduct Authority (FCA) guidelines could impact borrowers who had previously been rejected for a mortgage
  • What is Stress testing and why it is used?

If you are looking to buy a potential investment property, or re-finance your existing ones, it is essential to understand the financial process involved. Stress testing used to be a significant factor in this, and it aimed to ensure that borrowers could afford their mortgage payments, even if rates were to rise.

Although the formal stress test has been scrapped, lenders still need to assess affordability and consider your income when looking at your mortgage application. How do lenders assess your finances without a stress test?

Stress testing explained

Stress testing required borrowers to demonstrate that they could afford monthly repayments, even if mortgage rates increased by 3% above the standard variable rate of their lender.

Though no longer a formal requirement, the loan-to-income ratio remains in place.

The LTI limit puts a restriction on the number of mortgages a lender can issue to incomes greater than 4.5 times.

LTIs for landlords

It’s important to understand that buy-to-let properties usually require an LTV of 75-80%, meaning you’ll need a 20-25% deposit. Knowing the ratios is crucial when applying for a mortgage, affecting how much can be borrowed and the deposit size.

Why the official stress test was scrapped?

The Bank of England undertook assessments of their mortgage affordability tests, including stress tests. Following the review, the Financial Policy Committee withdrew its stress test recommendations. Rising property prices and the likelihood of more rejected applications due to stress tests played a role in the decision.

The impact on borrowers

Though stress tests are no longer required, lenders must comply with FCA guidelines. This means making a reasonable assessment of a borrower's affordability and offering financial products that do not disadvantage them. While these changes mean that some previously rejected applicants may now qualify for mortgages, others could also receive larger mortgages, which comes with its own risks. This is why it’s essential for lenders to have conversations with applicants about their finances to ensure responsible lending.


Impact on landlords

Buy-to-let mortgages are based on the expected rental income of the property, with lenders typically wanting rental income to be 125% of the monthly mortgage payments. The loan-to-value that lenders require may be impacted if the rental income is not high enough, thus requiring a larger deposit.


Criteria for assessing landlord affordability typically include:

· Income

· Deposit amount

· Employment status

· Age

· Credit score

· Location

Advice for applying for a buy-to-let mortgage

Researching the market is important, using a broker is key. It is also crucial to understand the costs involved in maintaining a property, including repairs, maintenance, insurance, agent rates, tax, and legal fees.

Stress testing remains a crucial factor in the mortgage application process and understanding its impact on borrowers and landlords is essential for making informed decisions when buying property.


Contact Emma at Exclusively Mortgages to discuss your needs:




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