2017 – Stress Testing, Rental Coverage Increases. Problem?

I hate negative headlines but I’m going to do one here just to highlight some issues that UK buy to let faces this year.

Rental stress coverage is increasing to 145% for most lenders so buy to let landlords will have to watch the rental returns far more keenly. The stress testing interest rate will be a perceived ‘standard’ on interest rates being 5.5% and let’s not forget overall affordability checks. All of this sounds terribly dramatic and makes us think that the lenders simply don’t want to lend but let’s put this into perspective and work out an example of a recently available new build 3 bed property we have in Merseyside.

The discounted purchase price is £115,000 meaning the buyer would need a 25% deposit (£28,750) leaving a required buy to let mortgage of £86,250. Most lenders are saying we have to assume a stress test based upon 5.5% interest rate so that means the payment on the stress test would be £395 a month. Then assume we need 145% rental income coverage of this payment meaning the minimum rent for the lender to be happy would be £573 per month. In our example currently available property the rent is forecasted at £650 per month would some agents suggesting £695. So here the rents are more than sufficient to cover the stress testing interest rate and more then sufficient to over the increased rental coverage requirements. So…is the stress testing and increased rental coverage a real and genuine problem or is this more negative headline grabbing nonsense? Let’s be fair and say YES we naturally have to be aware of the changes and take all changes and requirements into consideration but the simple fact is that as long as the property ticks the right boxes, is fully researched, ‘quality checked’ for the buy to let market AND offers true market discount the problem suggested really isn’t a problem.

Back to our Merseyside example to finish our point. We have market comparables and a RICS valuation to support the market price at £142,500, so that’s £27,500 cheaper than the registered professionals state the property is worth. So in brief summary a buyer would be £27,500 ahead of the local market in an ‘instant equity’ way, the property is circa £70 plus ahead of the new increased rental coverage requirements per month and that’s based upon the hefty 5.5% interest rate test. Problem? We don’t think so!

Straight Talking Forward Thinking.