Brokers can help landlords facing stress test challenges

It’s beyond question that the property market is in a testing space right now. The rocketing rates of interest that we have seen on all types of mortgage have understandably had an impact on the desirability - and frankly the affordability - of buying a home for plenty of would-be purchasers.

With the threat of a likely recession on the horizon, according to the Bank of England, there will understandably be many who will likely put off going ahead with their purchase.

Little wonder then that there have been warnings that we will not only see house price growth slow from its current incredible rate, but the value of properties may actually fall. In fact, in some cases forecasters have warned that prices could drop by as much as 30%.

However, investors - particularly those who make their living from property, rather than the amateur landlords - are unlikely to be put off by this short-term turmoil.

The underlying attractiveness of the UK housing market hasn’t really changed - we simply don’t build anywhere near enough homes to meet demand. Over time, landlords who invest in the right areas are likely to see respectable capital growth.

What’s more, with increasing numbers of prospective first-time buyers putting off purchases, it simply means continued strong demand from tenants, which may translate into higher rents and therefore a greater yield.

While some landlords will have decided to take a step back, others will recognise that this situation presents opportunities and so are still just as keen to add to their portfolios.

The stress of stress tests

Landlords who are wanting to buy face a rather different range of options today compared with just a few weeks ago. There are fewer products to choose from, for starters, with plenty of lenders taking a cautious approach given recent market volatility around swap rates.

With fewer products and higher rates, the stress tests involved in the interest cover ratios (ICRs) from rental income are also significantly higher than brokers and borrowers alike may be used to. We have heard of cases where lenders stress at 8%, the sort of level that is going to cause problems for any investor looking to marry their rental income with their mortgage repayments.

It’s not just landlords who are in a purchasing mood that are impacted though, those looking to refinance their portfolios will also face the combined challenge of higher interest rates and sterner stress tests.

In fact for some, the difficulties in making that work will be enough to prompt them to sell up and leave the market entirely.

At Mansfield, I’m proud to say that we are doing things differently, testing at 2% above pay rate. That’s a responsible margin to ensure that the landlord is able to deal with the potential for higher rates down the track, without testing at a level that makes the hurdle unnecessarily high for them to pass.

Making sums add up

Brokers have always had a big role to play with property investors; landlords value them not just for being able to identify a good rate, but also the lenders who are best placed to support the investor with their plans.

That partnership is only going to become more fundamental as the mortgage market goes through its current ups and downs, with brokers providing vital assistance and guidance.

Advisers are also likely to be at the forefront of helping landlords to make the sums add up. Understandably, the buy-to-let market has been fixated on five-year fixed rates for some time, but landlords may have to consider a range of options now. If they are determined to maximise their borrowing, then including discounted rates in their decision making will be important.

A landlord might struggle with stress tests of 8% plus, but the lower interest rates - and therefore more forgiving stress testing - involved with a discounted rate may make all the difference.

Working together

While some will no doubt cheer the particular challenges faced by landlords at the moment, the reality is that they have an important role to play within the property market. There will be no shortage of would-be first-time buyers who are unable to buy now as a result of the increases seen on mortgage rates, and so will need to continue to rent. It’s important therefore that landlords are able to remain stable in the market, providing properties to rent at an affordable level.

That’s why it’s crucial for lenders and brokers to work together, to ensure that products which meet landlords’ needs continue to be provided, and for those borrowers to be properly educated on all of the options available.