Editor’s note: Can BTL take the stress?


The buy-to-let market was sent into a tailspin last week after The Mortgage Works announced a major change to its stress testing criteria.

The lender will not only increase its rental cover requirements from 125 per cent to 145 per cent but will also cut its maximum LTV from 80 per cent to 75 per cent on 11 May.

It was bound to happen eventually, of course, what with the Government gradually cutting tax relief from April 2017 and the Prudential Regulation Authority to introduce tougher stress-testing requirements in the not-too-distant future. However, the timing may have shocked some.

The PRA is proposing that lenders stress at a minimum rate of 5.5 per cent. When you do the maths, this means borrowers wishing to take out a 75 per cent LTV loan will need a property with at least a 5.2 per cent yield each year – a non-starter in places like London and the South-east, where house prices are highest.

Essentially, this means landlords will either be forced to save thousands extra for a deposit or take out a loan with an initial term of five years or longer as these will not be subject to the same rules.

While some will be able to stump up the extra cash, many will not, which will effectively lock them out of the market.

Much like the FCA did in the Mortgage Market Review, the PRA has proposed a rule waiver to avoid landlords becoming prisoners as long as they do not wish to borrow more.

But in the residential market, these so-called “transitional arrangements” were not widely taken up, so one can only assume the same will apply with the buy-to-let market.

TMW’s decision is clearly a sign of things to come. The market has been waiting to see how policymaker intervention would affect the market; this is now becoming clear.

It has been predicted that the buy-to-let market would continue to grow this year despite intervention but this is looking far less certain, especially when other lenders follow TMW’s lead, which is a very real possibility.