So you what to play the game of Buy to Let? But what do you do now that the rules have changed? Fear not, because all is not lost, but the key is finding the right opportunity.
Rather than tell you how to find that opportunity, this blog is to educate around the Buy to Let application process and to inform you as to what the lenders want.
It is often misconceived to simply focus on the Loan to Value (LTV) of the property and to work out how much deposit you would like to invest. As a minimum this will often be 20-25% of the property value. However, there is more to it than this, as the rental income will be of huge significance to the lender.
Recent stress testing of rental amounts has seen many an investor fall down because although they may feel that the property is of a decent equity investment, the rental off the back of this may not quite be as high as needed.
To be more clear there is a background stress test that will be undertaken on all underwriting on Buy to Let cases. This is designed to test not just todays rate of interest, but also against a theoretically rise in interest (average 5.5%). This is then multiplied, on average, by 125%.
E.G – A house is bought for £300,000, and an investor is looking to put down a 25% deposit. The loan, valued at £225,000, is secured at a rate of 2.4%. On an interest only mortgage the monthly payment would be £450 per month. This is simple enough, but then the potential rental amount must be taken into account. Stress testing against the 5.5% rate above would bring the monthly payment to £1031. Once we multiply this by 125% we have a necessary rental payment of £1,289 to ensure that this mortgage can progress.
So the above example demonstrates the key question. Will the property rent for that amount and, crucially, does the surveyor agree?
It really is this simple, and any discrepancy will ultimately mean that a higher deposit may need to be put down, so if you are looking at minimal deposits then think of this first.
Buy to Let can be a fantastic opportunity, even with recent government legislation seemingly trying to hinder investors. Only you can decide if it is something you wish to enter in to, but from a mortgage perspective it is very transparent. Do the figures stack up? Can the investment work?
If the answer is yes, then we can help. If it is no, then that property might not be right for you. However, do not be disheartened as there are plenty of properties waiting to unlock that investment potential for you.
If you want to find out more on the local opportunities for a Buy to Let property, then a great starting point would be to get in touch with Scott & Stapleton who are local property specialists. They can advise on any properties available today for investment purpose, or those that may require a refurbishment to unlock that investment potential.
When you are then ready to move with a mortgage, that’s where we can help.
Happy house hunting.
Pinnacle Mortgage Centre