Not enough brokers are backing stricter rent-to-interest calculations as stress tests linked to lower rates are setting themselves up for a fall
I am disappointed that calls from the broker community for lenders to relax buy-to-let stress tests continue to rumble around the market. As I said in this blog back in April, it is a very bad idea. And it seems that whilst I may not be a lone voice in the wilderness, there are currently not enough brokers openly supporting most lenders’ stricter rent-to-interest calculations.
I believe that lenders who have stress tests linked to a low initial headline rate are potentially opening themselves up to problems if bank rate rises too much because there may come a time when, as the reversion rate kicks in, the RTI calculation will not work. And then what will those lenders do? Well, in all likelihood, if the borrower is servicing the debt, the lender will do nothing, but is it responsible lending?
Woolwich should be congratulated for taking the lead on this issue. Post-MMR, on 19 May, it raised its calculation from 125 per cent at pay rate to 125 per cent at 5.79 per cent for all buy-to-let mortgages.
Surely it makes sense to stress the rent against the reversion rate or a higher, notional rate for term trackers? Don’t brokers have just as much a responsibility as lenders to take a responsible view?
The average reversion rate is around 5 per cent, so going from a product with an initial rate of less than 4 per cent to a reversion in excess of 5.5 per cent could be a real shock to some borrowers. A sensible broker would feel it their duty to warn any customer in this situation. It could be a business opportunity too.
Currently, vanilla buy-to-let properties are yielding an average of around 6.3 per cent, so if you applied, say, Woolwich’s RTI of 5.79 per cent at 125 per cent, on borrowing of 75 per cent LTV, the yield would only need to be around 5.4 per cent to fit the calculation. And with rental supply unlikely to outstrip demand any time soon it would be fair to say that higher rents are here to stay for a good while yet.
I understand there are brokers out there who are struggling to place deals for some higher value, lower yielding properties (mostly located in London and parts of the South East) but there are lenders out there who are willing to take a view. It is definitely worth picking up the phone and discussing scenarios on a case-by-case basis.
It is imperative that we brokers demonstrate prudence and have honest conversations with our clients about how they plan to service their mortgages over the entire term.
With prudence in mind, we continue to recommend five-year fixed rate buy-to-let mortgages to our clients – at least they afford some protection against pending rate rises.
This brings me to the latest buy-to-let product from launch Skipton Building Society – a seven-year fixed rate at 4.60 per cent to 60 per cent LTV. It is the only seven-year rate on the market and I welcome it, not only for the seven-year USP but also because it has no maximum age restrictions for borrowers. We will certainly be promoting hard to our older landlords whose borrowing options have been severely curtailed this year.
At the time of going to press I also noticed a number of buy-to-let lenders have been reducing rates. Whether this is to make up for a quiet summer, or competition driving down rates or whether they are just starting to think about meeting year end targets remains to be seen but it should definitely increase business. It is looking like a busy autumn.