Newsletter 2
Case Study # 2 – Buy To Let Lending in focus
According to the Council of Mortgage Lenders (CML) Buy to Let loans have now reached the 1 million mark. This falls in line with the increased demand for rental property due to a number of factors, including:
Tight affordability for first time buyers
More single person households
Increased student population
CML statistics also show that the level of arrears in the Buy to Let market are lower than residential loan and they appear less affected by the credit crunch as many hold large amounts of equity.
Buying to Let can be a profitable long-term investment strategy. However, landlord’s should take care to ensure they have sufficient surplus rental income to account for void periods, letting agents’ fees (if applicable) and maintenance costs.
However, with the increase in property prices in recent years outstripping increases in rental income, it can be difficult to obtain the 85% loan to value that borrowers often need.
Typically, lenders will 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% (6.25%) plus an uplift of 125%. This is to ensure any void periods are covered and is to ensure a prudent approach to lending. Let us see how this works on a purchase price of £250,000 at 85% loan to value and rental income of £1,200 pcm...
£250,000 X 0.85 = £212,500
£212,500 X 6.25% (BBR+1%) = £13,281
£13,281 X 125% = £16,601
£16,601 / 12 = £1,383 pm
Therefore, you can see the rental income that will be confirmed by the valuer (£1,200 pcm) and that needed to borrow £212,500 (£1,383 pcm) are very different. This is a significant shortfall and not uncommon for many high street lenders rental calculations, thus restricting your loan availability significantly. Remember, valuers are asked to provide an unfurnished valuation and use local recently rented comparables.
However, utilising our Independent status we can source not only the best interest rates for you but also look to maximise your 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.
There are lenders who will now use a more generous rental calculation to allow you to secure your maximum loan. These lenders may charge a higher fee but this may be the difference between you obtaining the loan and the property or not.
It may be the case that you do not want to pay a high fee. We can source you a lender who may not necessarily have the cheapest interest rate, but does have a generous rental calculation.
Several lenders now offer rental calculations of 100% of the product pay rate. If we take the previous example and assume a realistic current product with an interest rate of 6%.
£250,000 X 0.85 = £212,500
£212,500 X 6% (Product rate) = £12,750
£12,750 / 12 = £1,063 pm
So, as you can see, the rental income confirmed by the valuer would need to be only £1,063 pcm.
If you aspire to enter the buy to let market, there are many ways to do so. Please Contact Us with any enquiries relating to the above article and Buy to Let mortgages.
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!