Dear Dippy Jonathan, a 25 year old full-time hotel porter earning £16,000 a year, lives with his parents and wants to buy two buy-to-let properties in Manchester – a two-bedroom terraced for £35,000 and a two-bedroom semi-detached for £45,000.The rental yields are £200 and £250 per calendar month respectively. He has a deposit of £12,000 for the properties. What options are available?
Dippy says: With the buy-to-let market still booming in the North, it seems wise to invest in two properties. To offer advice we have Jennifer Tweed from buy-to-let specialist The Money Centre and Matthew Russell from The Mortgage Business.
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Jennifer Tweed is a consultant at The Money Centre
In recent years the North has experienced growth in the property market so Jonathan's choice of location is sound. As the properties increase in value this may allow him to release equity to establish a mixed portfolio. For example, the property that Jonathan is purchasing for £45,000 could realise more than £73,000 in the next 10 years assuming capital growth of 5% per year.
Given Jonathan's circumstances and the fact that he is purchasing properties of these values, I would encourage him to opt for The Mortgage Business' House 2 House product for the £35,000 property. The rate is 5% – based on base rate plus a margin of 1% for the life of the loan.
Based on a maximum loan amount of £29,750 (85% LTV), the repayments would be £125.20 per month, representing a yield of 6.86% per annum.
This product is also suitable as the lender does not insist that the applicant be a homeowner.
For the second property, valued at £45,000, I would recommend TMB's Ten to Let product. The rate stands at 5.5%. Based on a maximum loan amount of £38,250 (85% LTV), the repayments would be £177.07 per month, representing a yield of 6.67% per annum.The application process should be straightforward with both properties being financed by the same lender.
In fact, in this instance the same lender is offering suitable, competitive products for both properties but if necessary The Money Centre would have placed them with different lenders to get the best possible returns.
These two products also have no redemption penalties if Jonathan decided to dispose of the properties at any time. Further advances can be applied for after six months and the product is fully portable so that Jonathan could transfer the mortgages onto alternative properties if he decided to sell.
I would anticipate reaching the formal mortgage offer stage with this lender within 14 working days, during which time Jonathan would have appointed his solicitor to carry out the legal work.
During the next six to 12 months, The Mortgage Centre would try to keep in contact with Jonathan to establish whether there might be the opportunity to release equity from either of these properties to expand his portfolio. The addition of a small extension or an extra bedroom could also be an effective way to increase the value of his properties in a short space of time.
Matthew Russell is senior sales and marketing manager at The Mortgage Business
A first-time buyer with no previous lender history could present some lenders with a problem but at TMB it would not be an issue. The employment outline does not say whether Jonathan has a permanent or temporary position or how long he has been employed so we must assume that all these elements are satisfactory.
With regard to the property types, we must ensure that they are habitable residential properties suitable for purpose and not, for instance, divided up into multiple occupation units or holding more than one kitchen.
Although the valuation figures given are fairly low, we accept these inside our existing criteria. The first property at £35,000 would go onto our House 2 House product whereby the case is underwritten against the individual.
An income multiple of either 3.5 + 1 or 2.75 joint means that the loan amount of £29,750, based on 85% LTV will not be a problem. Even so the applicant will be able to self-certify his income therefore speeding up the application process. This product will only allow one buy-to-let property.
The second property could be taken on our Ten to Let product which is designed for buy-to-let portfolios. This second product is different in that it is self-financing.
There is mention of a rental yield at £250 per calendar month which, based on a tracker rate of 5.99%, will achieve the desired 130% income to mortgage ratio. Of course this product will also allow for further growth of the landlord's portfolio should Jonathan decide to take on further properties in the future.
There has been no mention of adverse credit and so again I am proceeding on the assumption that this is acceptable, which in the case of certain lenders will be different depending on the product applied for.
Most important for Jonathan is that both of the above buy-to-let products have flexible facilities. This will result in a manageable finance package to enable overpayments to be made during periods of tenancy or to take payment holidays or make part-payments when either of the properties are unoccupied. Should maintenance work be required, subject to the credit limit being available, drawdowns or further borrowing are allowed.
The above products are only available via the intermediary broker market and to help Jonathan get an early decision, an acceptance in principle could be taken from TMB using TMB interactive software.