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Dear Delia

Dear Delia, Simon and Natalie want to purchase a property to let out and can raise £20,000 for a deposit from their own home. Their savings will just cover Stamp Duty and other costs. The house they have fallen in love with costs £170,000 but the £600 rent falls short of the rental income needed for lenders’ 90% products. Their joint income is £55,000 and their monthly mortgage payments are £800. They have little other debt. What are their options?

Delia says: Simon and Natalie have several options, as Katie Tucker of John Charcol and David Murphy of The Mortgage Business explain.

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Intermediary response
Katie Tucker is product specialist at John Charcol

First, I would question whether Simon and Natalie are making the right move. When purchasing a buy-to-let house it is important to look at the property as an investment, not as one would look at one’s own home.

However, if the rental income in this case is low because of location or the state of the property and the couple are confident they can get it to pay for itself with some improvements over the next few years there’s no harm in buying, as long as they can afford to subsidise it for this period.

Even using GMAC-RFC’s 89% LTV 5.99% two-year fixed deal with rent calculated at 100% of pay rate, Simon and Natalie would need £748 per month to get a £150,000 loan. With The Mortgage Works’ five-year 5.78% deal they would need £722 per month.

Saving for a big deposit is difficult in the prevailing economic climate so as this couple’s income is strong, I’d look into whether lenders could lend on the house they wish to buy as a second property. If that is difficult, I would ask lenders if they would consent for the property to be let without charging the usual higher rate for this.

In situations like this, I’m normally a fan of West Bromwich’s top-slicing feature which allows borrowers to supplement the rent of underperforming rental properties with their own incomes, but it only lends up to 85% LTV.

If Simon and Natalie had other buy-to-let properties they would be able to look at Bank of Ireland’s portfolio products. BoI can consider rental income for all properties as a total, so higher yield ones cover shortfalls on lower yield ones.

The Mortgage Business has recently relaunched its House 2 House product which allows clients to buy an investment property using excess income, disregarding rental income. This may suit Simon and Natalie as their income is strong. House 2 House takes borrowers’ present mortgage as an annualised commitment, meaning the rest of their income can be used in an affordability calculation.

This gives a generous loan amount while ensuring the commitment is affordable. TMB is able to offer a 6.29% two-year fix at 90% with an arrangement fee of £699, no higher lending charge and no overhanging tie-ins, or a tracker at 0.99% above base rate.

Of course, it is an adviser’s responsibility to ensure that their clients’ main residence is protected when committing income elsewhere, so ensure you make your clients aware of the risks and document all your conversations.

Lender response
David Murphy is sales and marketing manager at The Mortgage Business

The buy-to-let sector is booming, continuing to outperform the overall mortgage market. As a result of this expansion, an increasing number of products are being developed.

Potential borrowers such as Simon and Natalie are a part of the reason len-ders have pushed the boundaries of product development and criteria.

There is no area of the mortgage market that could be accused of standing still and the buy-to-let sector is certainly no exception to this. It is seeing changes not only in the availability of stock and attitudes to risk but also in the way borrowers’ finances are assessed.

The issue of affordability is becoming important, with incomes on the rise but rental income in some areas not sufficient for traditional methods of calculating affordability. Our House 2 House product has been described as revolutionising the way buy-to-let properties are funded by using borrowers’ incomes rather than traditional rental assessments to calculate lending.

The product was designed to meet the needs of customers in areas where the increasing supply of properties to let is restricting rental incomes. The deal was designed to address this problem and appeals when rental income falls outside other lenders’ criteria. It appeals to advisers and packagers as it offers them a solution for customers who would otherwise have been unable to fund purchases.

Basing an affordability calculation on Simon and Nat-alie’s income rather than rental income would make qualification for this product and the application process quicker and easier.

This speed and convenience is important in a housing sector in which properties don’t get a chance to languish on the market for long. The success of the product with brokers and packagers is based on the fact that it removes the hassle inherent in the traditional way of assessing a property’s self-financing capability.

Although this product is now well known in the market, some potential borrowers are still thwarted from stepping on the buy-to-let ladder as they fall outside the LTV limit.

This is why we have recently extended House 2 House to 90% LTV on any one of up to three affordability-assessed properties, the other two being at 85% LTV. This means we’re able to make the product accessible to a wider range of borrowers and so help extend the market. Happily, this deal suits both the finances and the circumstances of Simon and Natalie.


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