Dear Delia Carpenter Bruce Dickinson has been self-employed for 15 months. He wants to enter the buy-to-let market and has found a property for £90,000. He wants to raise the 15% deposit by remortgaging his home from £60,000 to £73,500 on a property value of £105,000. But the expected rental return would only be 110% of the interest-only monthly repayment (at 5.24%). What are his options?
Delia says: With buy-to-let still booming, borrowers remain keen to enter the market. To offer advice we have Matthew Russell from The Mortgage Business and Rod Murdison, a specialist buy-to-let broker from Murdison & Browning. Have you got a problem for Delia? Email email@example.com
Rod Murdison is proprietor of Murdison & Browning
The most obvious solution would be for Bruce to raise a bigger deposit. This would reduce the size of the mortgage on the buy-to-let property. He would be able to do this as raising £13,500 only brings his LTV percentage on his house to 70%. Then he would merely have to calculate how much more he would have to raise to get the rental mortgage to fit the criteria.
Admittedly his domestic mortgage will increase but then the buy-to-let property mortgage decreases and it's likely that the interest rate on his primary residence, even on a selfcertification basis, would be the same as or less than a buy-to-let mortgage.
Another option is to wait. If Bruce has only been self-employed for 15 months, how would he fare if there was a recession? His earnings may fall and interest rates may rise. With either property, should property values fall in the short-term it wouldn't matter as long as the rent covered the mortgage and his personal mortgage repayments remained the same. It is not the capital value that's a potential problem – it's the income.
If the rent was less than the mortgage Bruce would have to be able to subsidise this shortfall. If the problem had been caused by large interest rate increases he would have his own increased costs to worry about too. On the other hand, imagine the above happening in 10 years' time. It is likely that the capital values of both properties would have risen so if values fell it is probable that there would still be spare equity in them.
It is also likely that both his personal income and the rental income will have increased by at least inflation whilst both mortgages would have stayed the same so if there were a fall in rent, Bruce would no longer be at the margin of affordability. Is he willing to take this short-term risk for longer term security?
My advice has had to be based on limited information. I've assumed the properties to be made of bricks and mortar rather than any unusual material – like heavy metal or rock. We don't know what Bruce did before 15 months ago; whether he has a partner from the landed gentry or whether they are married – or whether they intend to have a child.
I think this advice would strike a chord with Bruce. We would also revisit Bruce's situation in the near future to make sure he was getting the best deals on the market.
Matthew Russell is senior sales and marketing manager at The Mortgage Business
Firstly, for Bruce to raise the required deposit for the buy-to-let property we could consider a remortgage on our Self 85 product. This is available on a self-cert basis for clients who have been trading for just one year. TMB would require an income multiple of 3.5 x income for a single applicant and as a true self-cert lender we won't ask Bruce for proof of income, thereby speeding up the application process.
Looking at the buy-to-let property, the main issue for Bruce is the expected rental income which only equates to 110% of his monthly repayment. With the traditional self-financing buy-to-let mortgage many lenders will insist on a rental income of 125% of the monthly repayment but at TMB we can offer a solution. Our House 2 House mortgage is based on the client's income so rental income is not an issue. It is for a single property only.
As with the Self 85 mortgage, the client will be able to self-certify his income on the House 2 House product. The income multiple required is the same at 3.5 x income for a single applicant. However, we would deduct 7% from Bruce's existing mortgage commitment before applying the multiple.
With regard to the property, it must be a habitable residential property suitable for the purpose and not, for instance, divided up into multiple occupancy units.
Our buy-to-let product gives Bruce the added benefit of flexible options so he can manage his finances, matching his mortgage outgoings to the peaks and troughs of his cashflow. So for instance, when the rental property is let there is the option to make overpayments. Alternatively, if the property is temporarily empty there is also the facility to make underpayments or even take a payment holiday. The facility to draw down a lump sum could help if Bruce needs to finance one-off expenses such as repairs or refurbishment. Then if at some point he wants to expand his portfolio he could use the drawdown facility to fund a deposit on a further property, subject to the available credit limit.
As with all our products, the House 2 House mortgage is only available through the intermediary market and to speed things up advisers can log on to TMB Interactive for an online application in principle.
We've put together a simple guide to help potential investors like Bruce. The guide includes advice on finding the right property, managing the property, financial planning and legal information. It is available on our website www.t-m-b.co.uk