How to remortgage a buy to let in a higher interest rate environment

People who have buy to let rates expiring in the next 6 months have a slightly different landscape to deal with since interest rates have risen.? Why?? It starts with buy to let stress rates.

Buy to let stress rates are the interest rates that lenders use to assess your affordability for a buy to let mortgage. Lenders stress test your affordability by assuming that interest rates will rise to a certain level in the future, typically a couple of years ago this was around 5.5%. This is to ensure that you will still be able to afford your mortgage repayments even if interest rates do go up.

There are a few reasons why lenders use stress rates for buy to let mortgages.

Firstly, buy to let mortgages are typically interest-only, so your monthly repayments will only cover the interest on the loan, not the capital. This means that you need to have a financial cushion in place in case interest rates rise and your monthly repayments increase.

Secondly, buy to let landlords are more exposed to risk than residential homeowners. This is because they have to rely on their tenants to pay the rent, and if the tenant defaults on the rent, the landlord will still have to make their mortgage repayments.

Finally, lenders want to make sure that they are lending to borrowers who can afford to repay their mortgages, even in the event of unforeseen circumstances. By using stress rates, lenders can reduce the risk of default on buy to let mortgages.

How stress rates are calculated.

Stress rates are calculated differently by different lenders. However, the most common method is to use a Stress Interest Cover Ratio (SICR) which is a certain percentage set by the lender.? This can either be an arbitrary rate close to the lender’s standard variable rate (set by the lender) or the rate you are seeking to take out with them plus a certain margin (typically 1-2% above).

Lenders then also use a Rental Cover Rate of between 125% and 145% of the above rate. This means that your rental income must be between 125% and 145% of the lenders SICR.? The Rental Cover Rate can depend on a number of factors but generally is based on what income tax band you are in (for personal buy to lets).

How to pass a buy to let stress test

There are a few things you can do to increase your chances of passing a buy to let stress test, including:

• Choose a property with a high rental yield:?A high rental yield will mean that your rental income is higher than your monthly mortgage repayments,?which will make it easier to pass a stress test.
• Put down a large deposit:?A large deposit will reduce the amount of money you need to borrow,?which will lower your monthly mortgage repayments.? If you are remortgaging then perhaps putting more capital into the property.
• Use a mortgage broker:?A mortgage broker can help you to find the best buy to let mortgage for your needs and can help you to prepare your application.

If you are having trouble passing a buy to let stress test, you may want to consider talking to a mortgage broker. They will be able to advise you on your options and can help you to find a mortgage that is affordable for you.? The buy to let mortgage market is predominantly intermediary driven which means you often need the services of a broker to access all the deals on the market.?

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The post is for information purposes only and shouldn’t be viewed as advice. Please seek advice from a mortgage broker if you are thinking of remortgaging your home. A mortgage is a loan secured against your home.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE