Stress testing on investment BTL mortgages

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presidenttttt

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I was a bit surprised to see the level of stress testing going on with BTL mortgages at the moment.

Essentially rent needs to be close to 1.4 times the mortgage, and LTVs in excess of 60% are going to be tricky.

Pretty high interests at the moment for the banks to be taking practically zero risk!!

Is this trending up or down? Are rent pressure zones likely an issue here - capping revenue while costs are exploding?
 
15% most likely, and around 76% of that was resolved overnight by restructuring to interest only repayments.

93, 000 houses were built in 2006. We now have a fraction of that. Rent is not going to stop anytime soon.

Of course there is always some element of risk, though banks here seem to be adding buffer beyond the 1.2 which i believe comes from central?
 
It probably doesn't matter what the multiple is if the tenant chooses not to pay the rent.

And when people lost their jobs, they used their rental income to pay their living expenses or even their home loan.

Lending to property investment is inherently risky.
 
presidenttttt said:
I was a bit surprised to see the level of stress testing going on with BTL mortgages at the moment.
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By whom? Individual lenders? Unilaterally or mandated by the Central Bank?
presidenttttt said:
Essentially rent needs to be close to 1.4 times the mortgage
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I presume you mean 1.4 times the annual mortgage repayment amount?
presidenttttt said:
Pretty high interests at the moment for the banks to be taking practically zero risk!!
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Haven't BTL rates always been higher than PPR rates reflecting the higher risk involved (certainly not practically zero!)?
 
If the trend is the landlord stops repaying mortgage and uses the trend in hard times then a normal approach to risk would be to examine the landlords personal setup, which they don't do. They used to do this perhaps?

As Brendan says, if people elect to stop paying rent the multiple is irrelevant.

They state between 1.2 and 1.4, though appear to be operating at 1.4. Interested in others experience.
 
So from recent experience of the BTL mortgage process, here’s the details for 2 of the main Irish banks:

PTSB
- stress test is +2% interest and then a 1.4 times multiplier for the rental income to mortgage threshold.
- 30% deposit.
- best fixed rate for 5 years is 5.85%.
- despite all details being within parameters, it took over a month just to get mortgage approval as PTSB doesn’t really want BTL business at the moment and are still absorbing the Ulster Bank portfolio.

Bank of Ireland
- stress test is +2% and then a 1.25 multiplier for the rental income to mortgage threshold.
- 30% deposit
- best fixed rate for 5 years is 5.9% (some variance on BER)
- very fast on mortgage approval. Ended up going variable on the likelihood that ECB rates would drop over the coming year.
 
T McGibney said:
What happens if the next economic slump results in some sort of generalised rent strike?
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I have only 1 property let to tenants who actually pay me rent from their salaries. The rest are paid via HAP or UKR scheme (Government payments).

Five rental properties in total (for context).

The tenants who pay rent are eastern European and would have zero time for rent strikes.

It's an interesting thought though and one I had never considered before.
 
Even the HAP/UKR supported rents are vulnerable. If there's a correction in the housing market, rents will fall. Your sitting tenants will realise that they can rent a bigger/more convenient/more suitable premises elsewhere for the same (or less) money, so they'll move. You won't be able to relet the property at the same rent as before. Even if your new tenants are HAP/UKR supported, HAP/UKR will only be paying the lower rent.

So, yeah, lenders stress-test BLT mortgages against the possiblity of a fall in rent levels. That exact thing happened before so, as far as they are concerned, it can happen again.
 
TomEdison said:
If there's a correction in the housing market, rents will fall.
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Seen it before, 2009 or thereabouts had to drop the rent on an apt in smithfield to 680 pm.

Correct yes HAP rents fell also on renewal.

These are unusual events, they also come with a buying opportunity as property eventually falls in value. Took until 2012 for that to happen but you could buy a 2 bed apt in finglas for around 95-100k.
 
Persia said:
These are unusual events, they also come with a buying opportunity as property eventually falls in value. Took until 2012 for that to happen but you could buy a 2 bed apt in finglas for around 95-100k.
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Yes, but the buying opportunity is no comfort for a bank that has taken a security over the property — quite the opposite. Precisely because property values, and rents, are at historic highs both relative to earnings and relative to the prices of other goods and services, a downward correction is a real possibility, and the banks want to know that, even if that downward correction happens, the loans they have advanced will continue to perform — most borrowers can still afford their repayments even if their rental income falls, and if the security has to be enforced most properties will still fetch enough to cover the loan.

Tl;dr: lenders stress-test their BTL loans because they think there's a high probablity that those loans will, in fact, experience considerable stress.
 
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TomEdison said:
Yes, but the buying opportunity is no comfort for a bank that has taken a security over the property —
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Of course you are correct, apologies, I forgot that this was the theme of the thread. Completely off topic.
 
The last crash in Ireland was exceptional by international standards and more like something in war time.

House prices took five years to fall by about 50%. Rental prices took about three years and the full fall was only 25%.
 
Sure, it was exceptional. But it happened and, therefore, as far as lenders are concerned there is a non-zero probability of it happening again.

Plus, of course, the house price and rental fall figures you quote are averages, but they conceal wide variations. The lender is concerned not with what average fall in values/rentals in a future housing market, um, correction might be, but how much the value/rental of a single property might fall. There's an even-money chance that it will fall more than the median.

Tl;dr: stress-test parameters are set by gloomy people.
 
Correct house prices do not fall by the average, but the bank standardises its approach via a LTV framework for interest rates, and fixed approach to stress testing. In todays world with advanced analytics and ultra fast AI they should be able to reflect the fact the reality is not standardised.

For example, I do not believe a bank faces the same risk backing a mortgage for a 3 bed detached house in a good area compared to an apartment in an area with social/crime challenges. Yet both have the same rules applied for lending. I believe in the crash apartments went down around ~60% in Dublin, Dublin houses 50% , and houses nationally closer to 35%.

Stress testing could also be nuanced, some land lords will have disposable income to navigate a period of rent prices falling, others will have no cashflow. Stress test ignores this too.

Complexity would be a reason not to do this, but technology solves most of that. I expect Revolut or another modern entity will drive this evolution in the near future.


I am not sure it would cost the banks either - some loans might go out with less margin, but they will be of higher quality/lower risk of default. A blanket approach of "we cant be bothered with BTL" seems like lazy approach to running a business.
 
A blanket one-size-fits-all approach for the industry as a whole would certainly be a bad thing. But it's entirely rational for a particular player to adopt of a strategy of "We only want the straighforward cases, that don't require careful assessment of special circumstances — that's our market segment, and we'll compete on price. Other lenders can take the more complex cases that require case-by-case consideration and assessment, an charge a premium for that".
 
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