is our take on what is currently happening in the mortgage market. Our views
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  • Affordability calculators begin to limit all including higher earners
  • Interest rate increases bad news for landlords

Affordability calculators begin to limit all including higher earners

In response to record high inflation and recent ONS data, many lenders made their affordability calculators more stringent. At the same time, lenders have to stress at higher rates in light of mortgage rates and lender’ SVRs increasing. We have seen this affect borrowing power for lower earners, but for the first time, we are starting to see these changes to affordability calculators take effect on higher earners when comparing affordability to six months or a year ago.

  • It is not unusual for lower earners to be limited by affordability rather than the other measure which is income multiples, however this is the first time several of our brokers are seeing higher earners being capped on affordability, where previously often these borrowers would have been capped purely on income multiples. One borrower who we had quoted a year ago now has a higher basic salary by £20k and bonus payments £10k higher than last year, however their affordability was the same.
  • Additionally, we had to approach alternative lenders after two large high street lenders couldn’t offer 5.5 income multiples, even though the client had a high income. There is still the option to go to other lenders to satisfy our borrowers requirements, however sometimes there is a premium here.
  • Since the Bank of England confirmed they will be withdrawing the affordability test from 1st August 2022, there has been little news from lenders how they will implement the easing of the stress testing. We expect to hear from lenders soon and it will be useful to see how this will have a positive impact on affordability. Affordability is only going to become more challenging considering inflation, base rate and SVR increases.

Interest rate increases bad news for landlords

Despite rising at a slower rate compared to residential rates at the start of the year, buy-to-let and limited company buy-to-let rates appear to have caught up now with residential rates rises. There are still some great rates in the BTL market, currently between the low to mid 4%s for a ltd BTL, however they are still expensive by nature. For a while, as residential rates were increasing, lenders were holding margin on BTL and ltd BTLs but have adapted quickly in recent weeks and months.

  • Most specialist lenders stress BTLs on a 5-year fixed rate at a certain cover ratio at the pay rate the loan is granted at. Over the last few years, a client’s pay rate may have been between 2.9% to 3.5%, whereas now these rates are in the 4%s.
  • The situation is not too bad now if you compare this to 5 years ago when lender’s stress rates, interest rates and ltd BTL rates were similar to what they are currently. However, in the next 2 to 3 years, if rates were to stay as high as they are now, a landlord could reach the end of their fixed rate deal and find themselves not able to remortgage even their current level of borrowing due to the new rates / stress rates, getting stuck with their current lender, or on the lender’s even higher SVR. The calculations on this are based on rental figures, so it could mean that they try to charge higher rents to achieve the level of borrowing, or it could even mean they are forced to sell as not many properties are profitable if paying a lenders SVR on the mortgage.
  • Landbay recently announced they have secured new funding to launch long-term fixed rate mortgages. The BTL market will benefit from more players in the longer-term fixed rate market and provide more options for landlords. For more information:
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