Buy-to-let lender adjusts rental assessments for higher borrowing
By Paul Brett, Managing Director, intermediaries at Landbay
The private rented sector is experiencing huge demand with reports of people queuing up to view properties and having to pay over the asking rental price in some parts of the country.
A housing supply shortage plays a big part in this but it does offer up opportunities for landlords, both new and existing, to fill in some of the void and invest in rental property.
If finance is needed, buy-to-let mortgages are the way to go but there are so many different criteria, products, lenders, types of property and types of landlord. In many cases, buy-to-let borrowing can be complex and the range of mortgages daunting. At the moment we have 138 products available because we cater for so many different scenarios, from first-time landlords and limited companies to those purchasing Houses in Multiple Occupation (HMOs) and Multi-Unit Freehold Blocks (MUFBs).
Mainstream lenders tend to lend only to individual landlords, classed as those with one to three properties. Where it gets more complicated is lending to portfolio landlords, those with four or more properties. Additional complexity, in respect of the underwriting process, comes in here as lenders have to assess all properties within the portfolio, even if they are mortgaged to a different lender. Fortunately, we have a very robust, self-developed system which makes this part of the affordability assessment more straightforward than it sounds.
Changes to rental assessment
The Income Cover Ratio, of course, is a key part of the affordability assessment but significantly higher interest rates when landlords remortgage could mean they don’t pass lenders’ ICRs. This usually means they will have to increase the rent to meet the ICR.
At Landbay we are always keen to look for ways to help landlords when circumstances change beyond their control. So, we have revised our credit policy for remortgaging landlords to assess affordability based on market rent rather than passing rent, which could carry positive implications for borrowing levels. Passing rent is often lower than market rent, typically because landlords want to keep long-standing, good tenants or provide assistance to tenants facing financial difficulties.
As an example, a property has a market rent, as stated by the valuer, of £1,250 but the landlord only charges £1,000. The average five-year fixed product for a limited company is 5.75% stressed at payrate. In this case, the £1,250 rent would give a maximum gross loan of £208,695, whereas if the calculation was based on the passing rent of £1,000 it would only give £166,956. This increases the borrowing available to the landlord by £41,739.
The advantage is that landlords don’t have to raise the rent merely to meet lending criteria and avoids potential disruptions with their tenants' current agreements.
Remortgaging and interest rate uncertainty
Intermediaries will be kept busy with plenty of remortgaging business for the rest of the year. But due to the uncertainty around future interest rates, many borrowers don’t know which product to take. This is why the role of brokers is so important because the choices can be overwhelming.
It is also why we have a range of two and five-year fixes as well as two-year trackers to choose from. Our two-year Like-for-Like remortgage range is suitable for landlords who require no change to their borrowing. These products are stress tested at a lower ICR of pay rate plus 1%, instead of the standard 2%. The other advantage is that the tracker can be redeemed with no early repayment charges, so if rates were to go down a borrower could move to a lower fixed rate without penalty.
For borrowers who prefer a longer five-year fixed rate but think rates may fall within that time, we offer a five-year fix but it has no ERCs after year three.
Specialist buy-to-let lenders are highly experienced in complex lending requirements and we make every effort to pass a case through if we can.
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