The Stress of Stress Testing with Rising Interest Rates

This blog post accompanies Episode 46 of Expat Property Story.

You are an expat property investor. It is October, 2022

You are buying an HMO. Your expected gross rental income is £30,000

Your mortgage broker has found you a rate of 7.49%.

Your mortgage broker stress tests your loan at 125% at 7.49%

30,000 / 1.25 = 24,000

24,000 / 0.0749 = £320,427

Shortfall of loan                                         - £2,073        (£322,500 minus 320,427)

Money left in the deal:                             - £4,073

You purchase the property on a bridge. It takes 6 months to complete the refurb / refinancing, by which time interest rates have gone up by 3%.

Your mortgage broker stress tests your loan again at 125% at 10.49%

30,000 / 1.25 = 24,000

24,000 / 0.1049 = £228,789

Shortfall of loan                                        - £91,711     (£322,500 minus £228,789)

Money left in the deal:                            - £93,711

In this case, because your rental income has been stress tested at the new interest rate of 10.49%, your lender has reduced your loan by  £91,711, and you still need to repay the 30% bridging loan (£90,000) you took out to buy the property.