Tenants default on their rent, occupants leave and costs for the repair and redecoration of properties are incurred. This is the reality of the buy to let and commercial mortgage market place we operate in. However, these eventualities are planned for and mitigated by lenders carrying out comprehensive stress tests, which include checking the customer's affordability against an inflated interest rate to ensure they will be able to pay the mortgage if they fall on hard times and allowances for voids and costs - whether these are market or credit-driven.
However, these stress tests appear to be becoming significantly less stringent than in the past few years. Lenders are launching products where the level of stress testing is completely inconsequential. This is where the market was pre-credit crunch and it will ultimately lead to a rise in mortgage arrears in the buy-to-let market.
It is our responsibility as lenders to make sure customers can pay the mortgage today and in the future, including when unforeseen events occur, as inevitably they do.
So why does this appear to be happening again? I can only think that when lenders have little else to differentiate themselves from the pack, they resort to competing for business by compressing their stress tests, which in turn allows customers to borrow more money and potentially get into difficulties.
For example, if a customer wants to buy a £200,000 property, they may be able to borrow £130,000 from one lender, but a lender with lower stress test rates may allow them to borrow £160,000.
The lenders who are moving in this direction do still have some levels of stress testing in place - thankfully no one has gone as far as to scrap stress tests completely yet. But these lenders are only building in a small margin, which may not cover the costs of a redecoration of the property for example.
Just because the buy-to-let market and commercial mortgage market is not regulated, this does not mean we should act accordingly. As lenders we have a responsibility to ensure that customers can continue to afford their mortgage payments when interest rates go up or when tenants leave without warning. The majority of lenders still do this but a growing number are risking the reputation of the entire industry by using these tactics. Trust in the industry is still fragile.
Ultimately, the only person who is being put under stress in this scenario is the customer and they are the ones who will suffer. In order to move forward, we need to avoid falling back into old habits. Our future lies ahead of us, not in the past.
Robert Lankey, Managing Director of Aldermore Commercial Mortgages at Aldermore Bank
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