How buy-to-let stress tests work

The rule

A buy-to-let lender does not primarily care what you earn. It cares whether the rent covers the mortgage interest with a margin - and it tests that at a rate well above the one you will actually pay, so the loan still works if rates rise.

Three numbers go into it:

• The rent. What a letting agent will confirm the property achieves, not what you hope for. The lender's own valuer gives a rental figure and the lower of the two is used.
• The stress rate. Commonly around 5.5%, or your pay rate plus two points, whichever is higher. Five-year fixes are often stressed more gently, sometimes at the pay rate itself.
• The cover required. 125% for a basic-rate taxpayer, 145% for a higher or additional-rate taxpayer, and often 125% for a limited company.

Why your tax band changes the answer

Since mortgage interest stopped being a deductible expense for individual landlords, a higher-rate taxpayer keeps considerably less of the rent after tax. Lenders build that into the cover requirement, which is why the same property can be approved for one person and declined for another with a much larger salary.

It also explains the move to limited companies. A company pays corporation tax on profit after interest, so interest remains a genuine expense - which is why company applications are frequently assessed at 125% regardless of the director's personal tax position.

Four levers when a deal fails

There is a fifth, which is to buy a property with a better yield. Often the real problem is not the mortgage but the deal: a property in an expensive area with a modest rent will keep failing the test no matter which lender you try.

Top slicing

Some lenders will let you use surplus personal income to bridge a shortfall in rental cover. It is genuinely useful for higher earners buying in low-yield areas, and it is not offered by everyone. If your deal fails on rent but you have strong income, ask specifically about top slicing before giving up on the property.

What the test does not tell you

Passing the lender's stress test means the lender is comfortable. It does not mean the investment is good. The lender is not counting:

• Letting agent fees, typically 10% to 15% of rent for full management.
• Void periods. Budget at least one month a year.
• Maintenance and the boiler that will eventually fail.
• Landlord insurance, gas safety certificates and electrical inspections.
• The EPC rating you are legally required to maintain, and what improving it would cost.
• Income tax on the profit.

Run your own numbers with all of that included, and then run them again with the rate two points higher and three months of voids. A deal that survives that is a deal worth doing.