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What’s Happening With Buy-To-Let and Lending

Morgan Stewart, GPS Financial, comments

As we start 2023 with the outlook of economic uncertainty and a   looming recession, I am looking back in this article at the year that was, to chip in my two pence worth for the prospects of the buy to let market in the coming year.

First, a little about me; I started out as a brick layer/general builder investing in single buy to lets and HMO’s in 2012. It was a good time to invest in property as prices were suppressed due to the credit crunch and finance was cheap due to low interest rates. I soon had enough of working with the tools on building sites and in 2013 decided to set up a specialist mortgage brokerage looking after property investors and developers, and GPS Financial was born.  

Over the best part of a decade our industry has undergone many changes - from the wild west days of the self-certification mortgage through to the Mortgage Market Review, which restricted interest only loans and implemented stress testing. These mainly effected the residential market until the Prudential Regulation Authority (PRA) brought in mandatory stress testing in 2017 for buy to lets. This was set at 5.5% when the BOE base rate was still at 0.5%.

So, how does the stress test affect buy to let loans? Unlike residential mortgage affordability, which is dependent on your income, how much you can borrow for a buy to let mortgage is based on the rent.  How this works in practice is that the lender will state that the rent will need to be 145% of the mortgage payment stressed at a nominal interest rate of say 5.5% and this would give us our loan amount. Now, there are some exceptions to this rule in the PRA handbook. For example, a five-year fixed product could be stressed at the pay rate and, if the borrower is a limited company, then the rent multiplier could be 125% instead of 145%. This exception means that many properties that are let to single families would be financed on a five-year fix to achieve the desired loan amount, especially in the south of England where property values are higher compared to rents.

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