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Buy-to-let mortgage affordability stress test

A stress test is designed to make sure that you can continue to pay your mortgage repayments if your interest rate increases significantly.

Stress tests have become more of an issue for borrowers and lenders after the Bank of England base interest rate gradually increased from 0.1 per cent in October 2021 to 5.25 per cent by September 2023.

In the past, stress tests were usually done at three per cent above the lender’s standard variable rate. However, as interest rates have increased significantly, some lenders have been assessing buy-to-let mortgage applications with stress tests up to eight per cent.

Using the example of a property being bought for £310,000 with a £62,000 deposit, monthly mortgage repayments would increase to £1,653 with an interest rate of eight per cent. As a result, the minimum rental income would need to increase to £2,066.55 a month to meet the 125 per cent ICR.

It’s important to note that different lenders apply different interest rates as part of their stress testing.

This article is intended as a guide only. Please get advice from a mortgage adviser or financial expert if you’re not sure of anything.

Is there a Bank of England mortgage affordability test?

Rules for stress testing buy-to-let mortgages are set by the Bank of England’s Prudential Regulation Authority (PRA).

In 2016, the PRA introduced new underwriting standards which require lenders to make sure borrowers can cope with:

Since 2022, many average BTL rates have surpassed 5.5 per cent. This means a stress test of two per cent above the product price is likely to be used by most lenders.

However, it’s been reported that lenders are stress testing beyond the requirements to reduce risk, which is making it more difficult for buy-to-let borrowers to get their application approved.

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