Newsletter 1
Case Study # 1 – Buy to Let PLUS Free taxation guide
With the rapid increase in property prices in recent years, many Landlords are finding it challenging to obtain high Loan to Value Buy to Let Mortgages due to the Rental Income calculations used by lenders.
Whilst we are seeing a slowdown in the number of new enquiries from first time buyers, if people are not buying, then they are renting and subsequently we have seen an increase in Buy to Let activity.
This case study aims to show you scenarios which can assist you obtaining a property to let and alternatives when conventional lending methods may not be suitable.
Take a typical buy to let purchase:
£250,000 purchase price @ 85% Loan To Value = £212,500
Anticipated rental income = £1,200 pcm
Typically and more historically, lenders would apply a margin on top of a higher interest rate than you are actually paying. For example, they would want the loan to be covered on an interest only basis at Bank Base Rate + 1% (6.75%) plus an uplift of 125%. This is to ensure any void periods are covered and is to ensure a prudent approach to lending. Let’s see how this works...
£212,500 @ BBR+1% X 125% = 17,930 / 12 = £1,494 pm
So, you can see that the rental income that will be confirmed by the valuer (£1,200 pcm) and that needed by the lender (£1,494) are very different. This is a significant shortfall and not uncommon for many high street lenders rental calculations.
However, utilising our Independent status we can source not only the best interest rates for you but also look to maximise you loan on a Buy to Let property. This is often a strategy for investors as you pay income tax at your marginal rate on any profits from your buy to let income.
Surplus Income may be used to overcome the problem of rental calculation shortfalls. Several lenders will use either a combination of your personal income and expected rental income or solely base their lending decision on your personal income.
Couple – Joint income - £100,000
Existing residential mortgage £250,000
Maximum loan (utilising affordability calculations) = £475,000
Available affordability for Buy to Let lending = £225,000
This does not even take into account the rental income to be received. Several lenders have more lenient rental calculations but to the detriment of yourselves by charging
higher arrangement fees. It is therefore vital to get the balance right between these 3 variables – maximum loan, fees and interest rate. Lenders are having to become more flexible with their lending criteria and whilst the recent ‘Credit Crunch’ has seen a slightly more cautious approach to lending, if you aspire to enter the buy to let market, there are many ways to do so.
FREE BUY TO LET TAXATION GUIDE – Contact Us for a free copy of one our lending partners guide to Buy to Let taxation for handy tips on how to maximise your gains and minimise your tax bill!