His parents live in the country and he is keen to buy a property nearby with a view to renting it out for at least five years. The property is for sale at £200,000 and he needs 80% of the purchase price to secure it quickly. What are the options available to him? Delia says: This property should be self-funding so Mr Upton shouldn't have a problem. To help out I asked Ramona Leavers from AToM and Roger Hiller from Mortgage Express. Have you got a problem for Delia? Email firstname.lastname@example.org
Ramona Leavers is marketing manager at All Types of Mortgages
As Mr Upton wants to buy a property to rent out, his income of £75,000 will only be looked at to ensure he is able to meet his own residential mortgage commitments (£80,000) and any other personal financial commitments he may have. The main reason for this is so that lenders can be assured Mr Upton is not reliant on any surplus rental income to help fund his normal lifestyle. Some lenders (though not all) will wish to see proof of this through accounts or an accountant's affordability letter so if Mr Upton has an accountant working for him all they need to do is verify his income. Alternatively his tax returns will also provide details of his taxable earnings.
Some buy-to-let lenders like to see that applicants are residential homeowners or that they have a minimum income (usually between £10,000 and £20,000). Lenders sometimes stipulate that applicants should be residential homeowners because these borrowers already have a history of making and maintaining mortgage payments, the theory being that they will be less likely to default on their buy-to-let mortgage.
With regard to the buy-to-let purchase it is expected that the property will be self-funding. Usually lenders like to be assured that the rental income will cover the mortgage by either 125% or a 130% of the lender's ascribed products or initial rate. This is something that the valuer will ascertain and confirm when they go to view the property. The valuer must confirm that the applicants are likely to achieve the estimated rental requirements based on the lender's criteria.
In this case AToM would recommend Bristol & West's buy-to-let product, where the rate is currently one of the lowest in the market (5.6%). This is based on Bank of England base rate plus 0.85%. However the rental calculation will be worked out on 130% and an interest rate of 6.5% will be applied to this calculation which means that Mr Upton will have to achieve at least £1,127 in rent per calendar month.
Alternatively, AToM has a PMPA exclusive with Platform at 5.65%. This product is a two-year tracker (base rate plus 0.9%), is MIG-free and also offers the applicant £750 cashback. The rental calculation is also worked out on 130% on an interest rate of 6.7% so in this instance Mr Upton would need to achieve £1,161 each month.
If for some reason the anticipated rental income falls short on the above product with Platform, Mr Upton could utilise a five-year tracker where the rental calculation is worked out on 5.65%. This deal has no cashback option.
Charles Reed is managing director at UCB Home Loans
Mr Upton's is a pretty straightforward buy-to-let case although he may have problems obtaining a mortgage from a standard high street lender as he lacks three years' accounts with which to prove his income. Whilst he has the opportunity to get his accounts up-to-date this would take time and money and he may still encounter problems as he has been in his job for under two years. Therefore his best option would be to go to a lender which offers self-employed mortgages with which he does not have to prove income in the normal way.
Mr Upton is in a strong position and would have many attractive mortgage deals available to him as the LTV he requires is pretty standard and he can afford the mortgage purely on his earned income, which is sufficient to cover both his existing mortgage and the buy-to-let property.
However, at UCB Home Loans we can take earned and rental income into account and therefore once the rental assessment is received from the valuer we may be able to reassess his borrowing as it would be prudent for him to borrow enough to cover any maintenance costs and void periods, and perhaps pay for a managing agent if this is what he chooses to do. He may also need extra capital to furnish the property if he is to rent it out.
Speed is of the essence here, with Mr Upton being keen to secure the property due to its location near his parents' home and at UCB Home Loans we would aim to provide an offer to Mr Upton within 10 days of receipt of the application assuming he meets our criteria and passes a credit reference search.
Mr Upton must consider what the rental opportunities would be for the property. Being in the country he may only be able to rent it out during the summer months. In this case rental income would be seasonal and he would need a product which offered him the flexibility to make overpayments during the rental months in order to cover mortgage payments during the void periods.
Again, UCB Home Loans would be able to offer this type of product; either a five-year fixed rate at 6.49% if he wants to secure his finances whilst being able to take advantage of the product's flexible features such as overpayments, or alternatively if he wants full flexibility we are able to offer him a three-year tracker at 5.94% which provides the facility for overpayments, underpayments and payment holidays.