November 16, 2022

Every property investor should grasp the importance of navigating affordability and stress test challenges.

Miranda Khadr, founder of Provide Finance, Originally published on The Money Pages

Helping investors navigate affordability and stress test challenges

There’s no avoiding the fact that it’s been a rocky month or so for the property market. The top of government has faced difficult challenges, causing a sharp increase in interest rates compared to usual. This is impacting borrowers of all kinds.

On one level this has been a positive for property investors. Plenty of would-be first-time buyers are now unable to proceed with purchases, meaning they will have to remain on the rental market for longer. That means a continued crop of quality tenants for landlords to appeal to.

What’s more, the financial allure of property investment remains in place. For years – decades, really – we simply have not built anywhere near enough homes to meet the demand from those who aspire to homeownership.

This imbalance has led to the extraordinary rate of house price growth, providing investors with a significant return in terms of capital growth, as well as the rental income from their portfolio.

However, these rate rises have not been isolated to just residential mortgages – we have seen big jumps to the rates charged on buy-to-let deals too.

And those rate changes can create some issues for landlords looking to arrange their own finance, whether for existing properties or potential additions to their portfolios.

Finding the right finance

For landlords looking to fund a new purchase, or refinance an existing investment, the market looks rather different today from just a few short weeks ago.

First and foremost, there are fewer options from which to choose. The majority of lenders who pulled their ranges in the midst of the turmoil have returned to the market, but not all have done so.

What’s more, some have opted against competing in certain areas, holding back lending at higher loan-to-values for example.

Perhaps an even bigger challenge lies in the affordability tests. One of the key elements that lenders look for is the interest coverage ratio (ICR). Essentially this is how the rental income compares to the interest being charged on the mortgage. It tends to be set at around 125% to 145%.

Of course, as the interest rates charged on these loans increases, it puts that ratio under strain. This means landlords have to up the rent on their properties to meet those requirements.

It’s a similar story with stress testing. Responsible lenders want to establish that borrowers can afford their repayments, not only today but also in the future should interest rates rise further.

The rates used for those stress tests have been hiked by certain lenders, making it somewhat tougher for investors to pass them and access the funds they need.

Putting you in control

The good news is that while property investors may face a few extra hurdles, it remains absolutely possible for them to secure that financing.

While some lenders remain cautious, others have recognised the excellent prospects for the buy-to-let sector and are keen to lend.

For example, some have introduced higher fees to maintain lower interest rates, making it easier to pass those ICR tests.

The question for investors therefore is how they go about finding that financing. A broker, or platform such as Provide Finance, which connects investors with more than 200 lenders, can help.

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