Buy-to-let Rental Calculations After Rate Rises
How Buy-to-let Rental Calculations have been affected After Rate Rises
The buy-to-let rental calculations after rate rises are re-shaping the market. There will be Landlords rubbing their hands and others no knowing where to turn.
In an ideal world every Landlord would love to have buckets of equity and excellence rental returns. The truth is this is normally a sign of a mature portfolio rather than where most find themselves in the developing stage. Most calls I receive start from the position of: can I put down 20% deposit; and want is the maximum I can borrow on “£X” amount of rent.
Let’s face it the mortgages propping up the buy-to-let market have been speculator in last decade. Two pools of Lenders: Mainstream and Specialist; have worked side-by-side with the classification of “portfolio landlord” being the dividing line. This co-existence has been harmonious as both sides received the market share they craved. However, the Buy-to-let market is converging following the impact of Buy-to-let rental calculations after rate rises.
What do I mean? Well the battle of the Buy-to-let rental calculations has been present in long term fixes rates, 5 years or more, which have autonomy under PRA regulations. Mainstream Buy-to-let Lenders have typically applied a “notional” rate to stress-test rents whereas Specialist Buy-to-let Lenders have worked their calculations from the product payrate.
The notional rate method typically used 4% to 5.5% and at the lowest peak of interest rates the payrate drifted in below 2%. The reality is now 5 year pay rates, particularly at high loan-to-values, are being squeezed towards their notional rate counterparts and even beyond. The main distinction between these two packs of Lenders is close to extinction. And, aggressive tactics used by certain Landlords to amass property quickly is having the breaks applied.
What is the impact Buy-to-let Rental Calculations after Rate Rises?
Well let’s look at the table below. For simplicity I’ve worked on the basis the applicant is a high rate tax payer and the buy-to-let mortgage is interest only. There would be a lesser rental requirement for lower rate tax payers.
| Monthly Rental Needed | ||||||
| Rate/Mortgage Amount | £50k | £150k | £200k | £250k | £300k | £350k |
| 2.00% | £121 | £363 | £484 | £605 | £726 | £847 |
| 2.50% | £152 | £456 | £608 | £760 | £912 | £1,064 |
| 3.00% | £182 | £546 | £728 | £910 | £1,092 | £1,274 |
| 3.50% | £212 | £636 | £848 | £1,060 | £1,272 | £1,484 |
| 4.00% | £242 | £726 | £968 | £1,210 | £1,452 | £1,694 |
| 4.50% | £272 | £816 | £1,088 | £1,360 | £1,632 | £1,904 |
| 5.00% | £303 | £909 | £1,212 | £1,515 | £1,818 | £2,121 |
| 5.50% | £333 | £999 | £1,332 | £1,665 | £1,998 | £2,331 |
| Based on Higher rate tax payer factor 145% |
So pull out an example. In the not so distant past, before the rate rises kicked in, conceivably you could have been offered a 2.50% fixed for 5 years. The Mainstream Lender using their notional stress test method might have applied 4.50%, which on a £300,000 mortgage would have needed a rent £1,632pcm whereas the Specialist Lender £912pcm. Things are changing though as the next section of this article on “Buy-to-let Rental Calculations After Rate Rises” illustrates.
How do the Rental Calculations look after the rate rises?
Mainstream Buy-to-let Lenders 5 Year Fix Rental Calculations
| Lender | Payrate / APRC | Rental coverage factor applied |
| HSBC | 3.09% (APRC 4.6%) | 4.99% |
| Barclays | 3.30% (APRC 3.6%) | Payrate + Earned income affordability |
| NatWest | 3.30% (APRC 4.4%) | 4.50% |
| Metro | 3.29% (APRC 4.8%) | 3.50% |
| Godiva | 3.40% (APRC 4.5%) | 4.50% |
| TSB | 3.49% (APRC 4.8%) | 4.50% |
| BM Solutions | 3.44% (APRC 4.9%) | 4.50% |
| Accord | 3.56% (APRC 4.33%) | 4.08% |
| Virgin | 3.50% (APRC 5.2%) | 4.50% |
| The Mortgage Works | 3.59% (APRC 5.0%) | 4.50% |
Based on a £225,000 mortgage. Purchase price £300,000. 75% loan-to-value. Interest only. Non-Green energy efficiency products. Product listed in True Cost order over 5 years which factors in set-up costs as well as the interest rate. Current as at 23/7/22 source Twenty7tec.
Specialist Buy-to-let Lenders 5 Year Fix Rental Calculations
| Lender | Payrate / APRC | Rental coverage factor applied |
| Saffron | 3.97% (APRC 5.4%) | Payrate |
| Paragon | 4.75% (APRC 5.1%) | Payrate |
| CHL Mortgages | 4.55% (APRC 5.6%) | Payrate |
| Kensington | 4.64% (APRC 5.6%) | 6.18% |
| Kent Reliance | 4.94% (APRC 6.5%) | Payrate |
| Interbay | 5.39% (APRC 4.4%) | 4.29% |
| Foundation | 5.64% (APRC 6.4%) | Payrate |
| Vida Homeloans | 5.69% (APRC 6.3%) | Payrate |
Based on a £225,000 mortgage. Purchase price £300,000. 75% loan-to-value. Interest only. Non-Green energy efficiency products. Product listed in True Cost order over 5 years which factors in set-up costs as well as the interest rate. Current as at 23/7/22 source Twenty7tec.
So if you glance down the two charts you can see clearly the impact of Buy-to-let rental calculations after rate rises. The Specialist Lenders are in a bad place right now with the pay rates generally worse that their Mainstream Buy-to-let counterpart i.e. they cannot win business by saying they have a more generous rental assessment.
What next for UK Specialist Buy-to-let Lenders?
Well they could apply a notional rate themselves depending on their Funders.
Aim to bring “top slicing”, a method that takes into account disposal monthly income, to the masses. To date it’s been an underused facility due its time consuming calculations and target market of high earning employees rather than landlords.
Expansion into short-term lets, supporting low EPC rated stock, light refurbishment and HMO licencing.
However, it’s difficult to see how this is going to close the gap in the short term and rates are expected to go higher. There must be some worried Buy-to-Let Boards right now. Unless of course the Mainstream players step back?
