In addition to the ongoing rate rises, lenders are also raising their mortgage affordability calculations. What does this mean for landlords, and how could this impact your next application?
For a long time, we had grown used to a standard set of RTI (rent to income) calculations for buy to let applications. RTI calculations are used to establish if the rental income from a property is enough to cover not just the mortgage repayments but also provide a surplus of money for any property maintenance, financial emergencies, etc. This method of checking the viability of the mortgage was introduced and enforced by the Prudential Regulation Authority (PRA).
What’s happening now?
Standard rental calculations were set at a pay rate of 125% for limited company applications and 145% for individuals. Following Kwarteng’s mini-budget, lenders have been doing all they can to maintain profitability with the rapidly increasing SWAP rates. Many lenders withdrew entire product ranges from the market until they could see some market stability, with many just returning now. With mortgage rates continuing to increase, we are also seeing RTI calculations getting tougher.
Where mortgage interest rates were around the 2-3% level for a long time, these payrate RTI calculations worked well. However, for landlords now coming to the end of their fixed rates and looking to refinance, more and more are finding that their mortgage applications are coming back as unaffordable. RTI tests at 125% on a 2% deal compared to a 6% deal will result in significantly different financial outcomes, leaving many stuck for what to do.
What are the implications for landlords?
Landlords now face the main implication of getting less per pound of borrowing, causing restrictions in loan sizes and the number of applicants who can access a mortgage.
The increasing RTI calculation is also causing mortgage prisoners. A mortgage prisoner is someone who may be coming off a once affordable mortgage product but is now unable to afford any other deal from new lenders or even their existing lender. They are forced to remain with their current provider on the SVR or take a product transfer, which is likely significantly more expensive in this environment than the rate they have just come off.
What do we predict is going to happen going forward
We’ve started to see specialist buy to let lenders come forward making changes to their RTI calculations. The Mortgage Works has changed its calculations to 125%/145% at 8.49% instead of payrate. This is much higher than any of their rates within their product range but acts as a precautionary measure for the lender against any of their clients defaulting on their mortgage.
We expect that, as the market gradually settles, hopefully with the help of Jeremy Hunt’s new plans, calculations may again soften as lenders become less concerned about the risk of standard mortgage applications.
We also call upon lenders, particularly the specialist market, to take a view on cases. Lenders will be under pressure to review their product offerings to remain profitable, but they will also need to be flexible when looking at each case and application. If it’s clear that a borrower can afford the mortgage but is restricted by the tighter RTI checks, then it’s in everyone’s best interest for the lender to be more open to offering.
Why it’s more important than ever to use a broker?
The current market has made it extremely difficult for landlords to find a good deal that fits their portfolio. With a succession of rate rises making affordability already stretched, these changes to the RTI checks only cause further issues. Using a whole-of-market mortgage broker can simplify your process. Not only can they do the maths for you and check which rates you could qualify for, but with access to specialist lenders, your broker can access deals that you can’t. This may mean you can find a more competitive rate.
Our industry expertise and experience have allowed us to establish key relationships with the top specialist buy to let lenders. These relationships mean that we have access to bespoke deals, underwriters working specifically on our cases, and direct access to BDMs to discuss case-by-case requirements. As such, we are best positioned to do all we can to find the rate that suits you. If you’d like advice on your property investment plans or are looking to access a new rate, please get in touch. You can contact us on 0345 345 6788, or by submitting an enquiry.
21st October 2022