Variable rates and top slicing could help save BTL deals – Berry

Interest rates have increased, and this looks likely to continue, which in turn puts additional pressure on lender’s rental stress tests.

Ultimately this will lead to landlords needing to provide larger cash investments regardless of whether they are purchasing or remortgaging through a fixed rate buy-to-let mortgage.

However, there are other options available to secure a buy-to-let deal for your clients – through variable rate products.

Variable rates will obviously change with market conditions and the monthly mortgage payment will fluctuate accordingly. However, variable rates offer more favourable rental stress tests and product benefits.

So, the considerations for brokers are – which is best for my client? A potentially unaffordable fixed rate deal, which may not get over the line – but with the surety of the monthly mortgage repayment? Or a variable rate deal which can secure the property right now – but which comes with the uncertainty of future monthly mortgage repayments.

Obviously, the variable rate can be transferred to a fixed rate deal when future market conditions make it favourable to do so.

How might this work?

Let’s explain how this could work with an example.

Mr Smith has a Decision in Principle to purchase a buy-to-let property to add to his portfolio, but given the market conditions, he has been waiting, and wants a fixed rate option.

Property purchase price: £335,000
Loan required: £250,000
Rental: £1,400 per calendar month

If Mr Smith took a five-year fixed rate deal at 6.37 per cent, where the stress test was 125 per cent, the maximum loan available would be £210,989. This means Mr Smith would have to put an additional £39,011 into the deal to pass the lender’s qualifying criteria.

If Mr Smith instead took a two-year discount variable rate at 4.19 per cent (without any early repayment charges), where the stress test was 125 per cent, the maximum loan available would £244,363. This means that Mr Smith would have to put in an additional £5,637 to support the deal – a significantly smaller sum.

Alternatively, Mr. Smith could take a variable rate of 5.99 per cent – through a top-slicing buy to let.

This is where the lender uses Mr Smith’s additional sources of income to support the application to make up for any shortfall.

With a 125 per cent stress test, the loan amount of £250,000 could be achieved, meaning that Mr Smith would not have to provide any additional monies to get the deal over the line.

With rates rising to create a more challenging and fluid market, seeking a specialist financial partner and looking at different options to finance deals will strengthen your hand and help get the deal over the line.