Covid-19 led restrictions

Due to covid there has been a moratorium on  physical valuations: affecting HMO, high rise and high loan-to-value mortgages and BTLs.

From May 21st they will be starting physical valuations, however, initially it will be to catch up on the existing back log.

EWS1 Requirement for flats

Introduction of EWS2 may bring some level of respite to low rise leasehold flat owners. EWS certificate was designed to bolster lender concerns about lending to high rise buildings of 18 metres (above 6 storeys) or more that may contain

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Whole market lenders

Which lender is the best?

But to Let mortgages are complex loans.  With BTL mortgages different elements need to be considered.  Different lenders offer different solutions.  Some has no minimum income requirements, other may offer better rental income calculation, while others may offer the best fee structure.  

BTL Interest Rates.

From 1.61%. @ 75% LTV

Call Us on: 0750 7895365 or email: axessadmin@btconnect.com

FREE valuations available.

Buy to Let Mortgages

Buy to let (BTL) mortgages are for those looking to invest in property.  Investing in property can be for many reasons.  Some are looking to generate an income and for some, capital gain for the future as an alternative to a pension.  

BTL property market has been boosted as the affordability of owner occupier mortgages have fallen due to income lagging the house price inflation.  Hence, many residential FTBs /homebuyers have been priced out of the property ladder.  Therefore the demand for rental property has risen dramatically as more look to rent rather than to buy.  

How much can I borrow?

The level of lending on a BTL mortgage is based on the rent.  However, some lenders require the applicant to have a minimum income as well; to ensure they do not rely completely on rent for day to day living.  This is different if you are a professional landlord with a property portfolio.  

Maximum LTV is 75 – 80%.  However, higher the deposit lower the rate.

Criteria that affects the loan amount

  • Mortgage rate:  Lender’s apply a rental stress test to determine the loan amount.  The rate used for the stress test varies between long term fixed rates (5 years+) and short term fixed rates.
  • The applicant’s tax rate: Higher rate tax payers (HRT) gets lower maximum loan.  This is due to tax charge on rental income being higher and therefore less rent will be available to support the mortgage (especially if rates rise or there will be void periods in renting).  – see below.
  • Type of property and number of bedrooms:  A family home, individual let or a house of multiple occupation (HMO).  Naturally larger the number of rooms greater the rent to support the borrowing.
  • Type of ownership: personal or through a Liimited Company.  This is because tax on rental income for Ltd companies is lower than for higher rate taxpayers.

Applicant requirements

  • Residential owner occupier:  Most lenders require you to be a home owner.  Several reasons, including prevention of BTL properties being purchased to be occupied by applicant.
  •  First time buyer BTL: It is possible for a first time buyer to purchase a BTL property.  The maximum loan will be restricted to income based affordability, i.e. similar to a residential mortgage.

True First Time Buyer BTL: from specialist lender’s only with a higher rate.  Include parent’s buying for students.

  • Income: two types of lenders:  Those that require an applicant to have a minimum income and those that don’t.  Minimum income requirement can vary from £15,000 – 25,000.  Other lenders don’t need an applicant to have a minimum income, but they need the applicant to have an income so that their day to day living is supported independent of rental income. 

Evidence Required for income

  • Latest pay slips.
  • Sole traders: SA302: HMRC tax calculation & tax overview or accountant’s certificate from qualified accountant.
  • LTD Co Directors: Tax calculation & tax overview or accountant’s certificate.   Company’s accounts may also be required.
  • See our self employed section for self employed income documents requirement.

What income will be used for affordability

Sole traders.

  1. net profit for taxation i.e. before personal allowance

Limited Company Directors have 3 options.

  1. Salary + Dividends.
  2. Salary + net profit after corporation tax.
  3. Gross profit or retained profit. Some lenders will consider gross profit instead of salary + dividends if there is year to year consistency.

Not all lenders accept all options.  Therefore, lenders available will differ which option is selected.

Covid-19 – Due to the affect of restrictions currently, lenders will request additional information from self employed and furloghed applicants.  

Self Employed will need to provide answers to following.

  1. Is the business currently trading and what affect has covid restrictions had on income.
  2. Has the business taken government sponsored grants or funding.  If so it will be a detrimental to most applications.
  3. Bank statements for last 3 months show income received.
  4. How has the business managed to overcome the restrictions. 
  5. Income considered is lower of the last 2 year’s net profit.
  6. Importantly: mortgage holidays on personal home will have no affect on applications. 

Rental income requirement

The calculation.

  1. Your current tax rate – it is considered that a higher rate tax payer (HRTs) will pay more tax on rent and therefore have less rent available to pay the mortgage.  While a basic rate taxpayer (BRTs) will retain more of the rent as profit.  So maximum loan is lower for a HRTs.
  2. Whether the property is owned as an individual or a limited company will also affect the loan amount.  As well as if you are a portfolio landlord (i.e. own 4+ BTL properties).
  3. Rental stress test – the stress test is carried out by using what is called the ICR or the Interest Cover ratio and a notional interest rate.  The Prudential Regulation Authority (PRA) which govern mortgage lending requires the lenders to stress test the rental income to ensure that the mortgage is affordable even if the interest rates rise in the near future (next 5 years).  If the rate is fixed and for 5 years or more, lenders are left to follow their own responsible lending guidelines.  This allows lenders to stress test rent at a lower ICR leading to higher lending for rates of 5 years or more.

a. The ICR is set at a defined percentage above the rent e.g. 125% or 140% of rent. The notional interest rate is set at up to 3% percentage points above the actual pay rate.  The ICR and the notional interest rate can be subjective to each lender.

b. With some lenders the ICR varies based on individual tax rate or if lending to a LTD Co.  Such as 125% for non-tax payers or BRTs and 145% for HRTs.

c. Notional interest rate is based on how long the pay rate is.  If the rate is less than 5 years, it is set at a stressed rate such as 5.5%.  If the rate is 5 years or more it is usually the pay rate, which allows the maximum loan to be higher.

Example 1: Property value £300,000.  Loan required £225,000 which is 75% loan to value (LTV) with a deposit of £75,000.  Market rent £1200.  Which rate will allow the loan required?

Lender criteria: ICR: 125% for BRTs; 140% HRTs. 

Rates available: 2 year fixed 2.6%; 5 year fixed at 3.6%.

Notional / stressed rate for rates less than 5 years = 5.5%;  for rates 5 years or more = pay rate.

All ICR calculations are based on interest only payments.

  1. In this example you will see that on a 5 year fixed rate, the rate is higher and consequently the monthly mortgage payment is higher, but the lender will still lend more money than at the lower rate.

  1. If it is BRT opting for 2 year fixed: Max loan (calculated on annual rent) is-

=Annual rent/(ICR x notional rate*)                

[*Notional rate is stressed rate as it is a 2 year rate]

Max loan =(1200×12)/(125% x 5.5%) = £209,455

Another way to put is, rent needs to be 25% higher than the monthly mortgage calculated at stressed pay rate.

b. If it is BRT opting for 5 year fixed: Max loan (calculated on annual rent)

=Annual rate/(ICR x notional rate e.g. pay rate)

Max loan =(1200×12)/(125% x 3.6%) = £320,000.

  1. HRTs opting for 2 year fixed:

Max loan = (1200×12)/(140% x 5.5%) = £187,012

2. HRTs opting for 5 year fixed:

Max loan = (1200×12)/(140% x 3.6%) = £285,714

 

BRT max loan

Rent adequate

HRT max loan

Rent adequate

2 year fixed

£209,455

No

£187,012

No

5 year fixed

£320,000

Yes

£285,714

Yes

Example 2: The calculation can also be reversed to determine the rent required for a particular loan. 

Property value £400,000.Loan required £300,000; 75% LTV with a deposit of £100,000.What is the rent and at what rate can a BRT borrow £300,000?

Lender ICR: 125% for BRTs; 140% HRTs. 

Rates available: 2 year fixed 2.6%; 5 year fixed at 3.6%.

Notional / stressed rate for rates less than 5 years = 5.5%;for rates 5 years or more = pay rate.

All ICR calculations are based on interest only payments.

Rent required = (loan x interest rate)/(12xICR)

Rent required = (300,000×3.6%)/(12×125%) = £1125 per month rent is required to obtain a loan of £300,000 for a BRT if a 5 year fixed rate is selected.

Finally, different lenders can calculate the ICR in different ways leading to different levels of loans to the same applicant.