How does stress testing work on portfolios?

Stress testing on portfolios will vary depending on ownership types and also product choice. For example limited company owners and basic rate tax payers that own their property in personal name, might be stressed as follows for a £100,000 loan with a BTL property earning £550 per month, with an interest rate of 5.2% fixed for 5 years (annual rent / 1.25% / 0.052) = max loan. The calculation would be £6,600 / 1.25 / 0.052 = £101,538 and therefore this example would be affordable for a 75% product.

However, higher rate taxpayers, lending on a 2 year product for the same example might be stressed as follows, where the interest rate in 5.5% for a 2 year fixed £6,600 / 1.45 / 0.075 = £60,689 which is a reduced loan size as stress testing is harsher, both for higher rate tax payers owning in personal name (145% rental coverage) and the stress rate adds a 2% loading to the rate payable, owing to a less generous loan size.

How does stress testing work for LLP owned portfolios?

LLPs are usually stressed based on the individual tax status of each partner, some lenders might blend this also. For example, two borrowers, one partner being a higher rate tax payer and the other a basic rate tax payer, might be blended between 125% and 145% and therefore the rental coverage used in the assessment might be 135%

It is important to consult with your mortgage broker or your bank when re-mortgaging a portfolio owned in an LLP due to specific affordability assessments which vary amongst lenders.

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