For many landlords, the issue of affordability is one that continues to dominate conversation. As the Bank of England base rate remains high (at least compared to the last 15 years), many looking to remortgage or purchase a new rental property may be faced with significantly higher costs and outgoings in the coming months compared to what they’re used to. In fact, the Bank of England has warned that the average increase in monthly buy-to-let mortgage repayments will be around £275 by the end of 2025.
As a result of these projected rises, attention is turning to how lenders can ease some of the burden for borrowers. Apart from rates, the key issue is ICR stress testing. With tougher underwriting standards introduced in 2016 by the Prudential Regulation Authority (PRA) and put into practice in 2017, the guidance acknowledged that the “current industry standard is to set the minimum ICR threshold at 125%” and that a variety of factors – including rental demand, the borrower’s property-related costs and any tax liability associated with the asset – “may lead to higher minimum ICR thresholds”. In some cases this can rise to 145%, or even 165%.
The impact of higher stress testing
Introduced to safeguard against a high interest environment and to ensure borrowers aren’t going to default, the reality is that it can some applicants can struggle to meet ICR stress testing at 145% or 165%, particularly in the current climate.
As well as the issue of affordability, a higher stress test can sometimes mean a higher deposit is needed. This is due to borrowers having lower monthly payments if they have a bigger deposit. While this makes sense, this is not an option for all landlords, particularly those purchasing more expensive properties.
However, if ICR stress testing is set at the lower end of the spectrum then it allows borrowers to take out a buy-to-let mortgage with a smaller deposit, subsequently making their monthly repayments more affordable.
Solutions that work
At MT Finance, we have worked hard to create products that best suit our clients. We understand the pressures that landlords are under and have used this insight to shape our buy-to-let range accordingly. This includes setting our ICR stress testing at 125% on five-year products across all tax brackets while our standard residential loan-to value (LTV) is up to 80%. We also accept applications from first-time landlords and first-time buyers on standard residential products while adverse credit is accepted, subject to policy.
What really sets us apart is our flexible approach and can-do attitude. Each case is manually underwritten, meaning that we are able to take a common-sense view on any application that falls slightly outside our standard criteria. Brokers also have direct access to the case’s lead underwriter which makes for a smoother process and helps to improve communication between both parties.
Find out more
If you would like to find out more about our buy-to-let products then we’d love to hear from you. It’s quick and easy to contact us online and a member of our team will get back to you shortly.