The overall amount that can be borrowed is entirely based on the achievable rental income.
All lenders use a ‘stress test’ to assess the suitability of the borrower for a BTL mortgage.The stress test considers the rental income and the ability to pay the interest on the mortgage, or the Interest Cover Ratio (ICR).
As an example, a mortgage of £400,000 with a 5.5% ICR applied will result in monthly interest payments on the BTL mortgage of £1833.33 (£400,000 x 5.5% = £22000 / 12 months = £1,833.33). With the rental income of 125%, the actual monthly cost would be £2,291.66 – and this, is the lender’s expected rental value PCM.
For higher tax rate payers, the stress testing increases from 125% to 145%. The stress test applies to the total loan amount, not the property price.
With the complex BTL market, there is flexibility available in the ICR required. Standard calculations start at 125% at 5% for lower rate taxpayers and 140% at 5% for higher rate taxpayers. This means clients can access greater loan amounts than through the traditional high street lenders as standard. As with traditional lenders, borrowers can access lower stress rates when applying for longer fixed rate products over a 5 year or longer term. In the specialist market this starts from 3.60% giving much greater lending capacity.