Virgin Money announced plans to revamp its stress testing approach last month, reducing its stress test rate from five per cent to 4.5 per cent on fixed deals of at least five years.
And while brokers have welcomed lenders adapting the way they stress test, they have warned that the current rules may see borrowers end up on longer fixed terms through necessity.
Pushing borrowers onto longer deals
James Mole, managing director of London Belgravia Wealth Management, said that stress rate rules were “all over the place” at the moment, and suggested that as a result borrowers are being “forced” onto more expensive five-year deals purely because that’s all they can get due to the rental coverage.
He also argued that it seems that borrowers in London and the south east are more affected by this, due to the higher property prices, than borrowers in other parts of the country.
Mole continued: “In general the stress test rules are too tough. Buy-to-let is unregulated, so I’m perplexed why there needs to be so much cotton wool applied to the rules.
James McGregor, director at Mesa Financial Consultants, said that the way different lenders were applying the rules was leading to confusion.
He cautioned that some lenders are too lenient on lower rate taxpayers, arguing “it does not make sense to me why someone would be able to borrow less money if they are earning more.”
FCA should be sending a message
David Sheppard, managing director of Perception Finance, said that despite some improvements on stress testing, there was “still a way to go”, especially for borrowers who do not fit with the current stress testing but want to remortgage.
“There should be more lenders looking to see how they can help with mortgage prisoners for those that bought properties on the old rental stress test of 125 per cent. There are some already doing this but greater competition is needed and should not be limited to those that take out a five-year fixed,” he said.
Sheppard noted that this largely comes down to regulation He argued that if the FCA is serious about focusing on consumer outcomes then it needs to be “sending this message to lenders to allow them to show the leniency that a lot of them would probably like to have”.
More needs to be done to help landlords
Kala Sreedharan, sales and operations director at Mojo Mortgages, noted that current stress test levels were forcing landlords “to either switch to a worse rate, or tie into a much longer fixed deal”, with the latter particularly hitting higher rate taxpayers.
However, she said it was “refreshing” that lenders like Virgin and Skipton were addressing these barriers, adding: “For lenders, there’s a lot of concern around rental yields, but as a whole, the industry needs to do more to help landlords, in particular, portfolio landlords who are remortgaging on a like for like basis.”