my client wants to purchase a buy-to-let property worth £150,000. A valuer has confirmed the rental yield on the property as £500 per month. So far I have been unable to source an appropriate product due to the rental yield being insufficient to cover the monthly mortgage repayments. He earns £60,000 a year and has an existing residential mortgage balance of £127,500, credit card commitments totalling £2,352 and a loan of £120 per month. What are his options?
Never fear, the options are here courtesy of Nikki Haworth of Mortgage 2000 and Mel Dring of Freedom Lending.
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Nikki Haworth is corporate partnerships manager at Mortgage 2000
The buy-to-let market has changed dramatically over the past 10 years. Figures from the Council of Mortgage Lenders confirm that buy-to-let accounts for 11.1% of gross mortgage lending.
In 2006, over three million buy-to-let mortgages were taken out worth £38.4bn – an increase of 48% by volume and 57% by value on 2005 figures.
With growth has come diversity. There is a wider choice of buy-to-let products than ever, with every niche in the sector now being catered for.
Your client has several options, some of which would not have been available just a few months ago. The issue of affordability in buy-to-lets has been hotly debated and lenders have come up with a number of solutions that would suit this client’s situation.
Assuming he cannot remortgage his existing property to raise capital and reduce the mortgage on the buy-to-let property thereby allowing a conventional rental calculation, he will need a product that either does not require any rental cover or one that allows surplus earned income to be taken into account. There are a few options to consider.
As this client has a decent amount of surplus earned income he could use this to make up the shortfall in rental income. There are products which allow clients’ income to top up the rental income.
Using these would allow this client to self-certify his income and, even taking into account his existing mortgage, unsecured loan and credit card commitments, borrow the amount required.
Freedom Lending’s rates start at 5.98% for a three-year fixed rate or 5.88% for a three-year tracker.
The second option would be to ignore the rental income and use his own income with a self-cert product. These products have become more popular with brokers and lenders as they use clients’ self-cert income (taking account of existing mortgage payments) to calculate affordability, rather than rental income.
Several lenders offer products of this nature including Platform’s House Plus with a three-year tracker rate of 6.14% and The Mortgage Business’ House 2 House with a two-year tracker starting at 5.54% and a 1.5% completion fee.
Mortgages PLC’s House to Let also has a two-year fixed rate of 6.80%.
The limitation with all these products is that they are for one property only (except TMB which now accepts three properties), not portfolio applications.
Mel Dring is marketing director at Freedom Lending
The problem of rental income not being sufficient to cover a borrower’s monthly mortgage payments on a buy-to-let deal is not uncommon.
While Freedom has a range of buy-to-let rental income products that require just 100% rental cover at the product pay rate, where this cannot be achieved we also have a rental and earned income product option. This has been designed to address the issue of insufficient rental income and as the name implies, takes into consideration not only rental income but also an applicant’s regular earned income.
To be suitable, the applicant cannot be a first-time buyer and must have a minimum of six months’ continuous employment in the same occupation or a minimum of 12 months trading if self-employed. The minimum term is five years (maximum 40) and only one property is allowed. Loans are available up to £1m up to 75% LTV, £500,000 to 80% LTV, £400,000 to 85% LTV and £300,000 to 90% LTV.
To calculate the maximum advance the rental income is annualised. In this case it will be 12 x £500 = £6,000. The applicant’s self-certified income (£60,000) is then added to this figure = £66,000. Any financial commitments are deducted from the total on the following basis – 7.5% of any residential mortgage balance (£127,500 x 7.5% = £9,562.50), 12 x 5% of any credit card balances (£2,352 x 5% x 12 = £1,411.20) plus 12 monthly payments for any outstanding hire purchase arrangements or loans (£120 x 12 = £1,440).
The total deductions are therefore £12,413.70. This amount is then subtracted from the total useable income of £66,000 giving a figure of £53,586.30. Finally, that figure is multiplied by 3.5 which gives a maximum loan amount of £187,552 – more than sufficient to meet this applicant’s requirements.
Although the arithmetic may look a convoluted there is a simple calculator for brokers on our website which takes no more than a few seconds.
Finally, you should first refer to us if an application is for a mortgage on a property of non-standard construction or for flats or maisonettes over four storeys. If the term of a mortgage takes an applicant beyond normal retirement age, the adviser must ensure the applicant will have sufficient income to support the loan.
Buy-to-let mortgages which take into consideration applicants’ earned income as well as rental income provide flexibility and will grow in popularity.