Confusion regarding Buy to Lets and how lenders look at affordability.

Last weekend, we exhibited at the Property Investor and Homebuyers show at the London ExCel.  It was a great opportunity to talk to professional landlords, as well as those looking to take their first steps onto the Buy to Let sector ladder. 

With many changes and increases in taxation on profits being recently introduced along with licence requirements for houses of multiple occupation, minimum size requirements on rooms, etc, the Buy to Let sector has taken quite a beating!  Yet with interest rates so low and demand for rented properties increasing, and no clearly defined solution to help first time buyers, I can't see these changes killing off the sector just yet!

In fact, the exhibition showed how many people were genuinely interested in looking at renting out property as a long-term investment and project.  Including a number of first time buyers looking to buy a property to rent, rather than to live in. 

However, there’s a lot of confusion still regarding Buy to Lets and how lenders look at affordability.

So, to try and clarify - Since the Prudential Regulation Authority stress test rules came in to effect in 2017, lenders have to work out affordability based on the rental income achievable from the property and stress the product term over a five year period, often at 145% of a nominal rate of 5.5%.

Lenders interpret the rules differently and differentiate between a Buy to Let in a personal name compared to a property brought in a limited company name.

  

However, if the lender offers a fixed rate over a five year period, the actual pay rate can often be used, instead of the nominal rate of 5.5%.

Therefore, by way of example - A standard buy to let in a personal name, achieving a rent of £950 per month, with the calculations of 145% of 5.5%, would equate to a loan of £142,947

If we used the same example, but in a limited company name, and on a five-year fixed rate, the changes in loan achievable become very apparent: 

125% of 3.49% (Limited Co & 5 year fixed) - a rent of £950 pm = £261,318

Please note that these are examples only and every case is looked at and underwritten on its own merits

With all of the recent tax changes on Buy to Lets, you should now seek professional mortgage advice, along with in-depth tax advice from an accountant who understands property, limited companies and all the new rules surrounding landlords and, where applicable, portfolio landlords.

Self Employed? Not a problem..

A large myth suggests that because you are self employed, you will find it harder to get a mortgage. 

Maybe that was so a few years ago, but not today. 

Yes, the financial crash took its toll on the self employed and quite rightly killed off the ‘self certification’ type deals (no proof of income).  But today lenders are quite happy to lend to those who are self employed and have a good track record.  The majority of lenders require two years accounts and will tend to average your last two years figures.  However, there are also some lenders who will look to assist you even if you are in your first year.  Some will also consider just last year’s figures, even if you have been self employed for longer.

Generally, the longer you’ve been self employed and the more years accounts you have, the larger number of lenders you will have who are willing to assist.

Some lenders do not require to see your full accounts, but will require an accountants certificate to be completed.  This differs lender to lender. Some will require a full set of accounts and/or an accountants certificate! Some will require this and/or SA302s, tax year overviews and more.  All can be requested via HMRC. 

They may also require to review business bank statements to review day to day cashflows and possible projections for future income, including potential contracts, etc.

This can also change depending on the make up of your self employment, whether a sole trader, partnership, Ltd company director and so on.

Deposit requirements can range lender to lender, but the bigger deposit you have, the greater the number of deals will be available to you.

Finally, plan ahead.  Six months ahead of your mortgage requirements, make sure you have your house in order.  Check your bank statements are in good order, check you have the right accounts and relevant paperwork from your accountant.  Don’t have too many credit searches in a short amount of time as this could affect your credit score.  Ensure you are on the electoral role and have decent breathing space on card limits and loans.  All of this should put you in a good position before the lender even looks at their ability to lend to you! 

What is mortgage affordability?

One of the most frequent questions to start a mortgage interview tends to be around ‘How much can I borrow?’.   Only a few years ago, that could easily have been up to 8 x income with the minimal of fuss.  Oh, how things have changed, and rightly so!  Those were times with little control and the lengthy recession bore testament!

Today it is so much more intense!  For example, a lender will require to know your monthly budget spend figures, right down to every direct debit on your bank statements, including council tax, insurances, mobile phones, lottery payments and gym membership!  From these monthly outgoings, the lender will look at affordability and decide from there what mortgage amount might be available to you.  However, on the other side, not only can it be restrictive depending on your monthly outgoings, but it can also be very generous depending on what little outgoings you have!   The lender has a duty to make sure you can afford your mortgage today, as well as when rates rise and specifically to it being considered affordable over a 5 year period.

But this also means that what was once an affordable mortgage may suddenly become unaffordable due to the perception the lender has on consumer spending habits, both historically and projected for the future.  

We have seen the phasing out of income multiples and the introduction of affordability models.   So, no more straight forward 4 or 5 x income discussions.  The amount you can borrow will depend on your monthly net income against expenditure and living costs.  However, this also works positively for the right loan to value, right affordability and right customer, as lenders are willing to offer a little bit more. 

With the increase in requirements, the time taken in research prior to recommendation for a suitable mortgage product has also increased, as have the lenders own underwriting procedures.  So, beware if you are in a rush!    

Coming to the end of your mortgage deal? What next?

Some lenders are distributing letters to those coming to the end of their product term offering them new rates, but indicating a deadline in which to switch.  We had one customer recently who was four months out from their current rate changing from a fixed rate to the lenders Standard Variable Rate.  They were offered some great new rates to stay with the lender, but had an effective deadline of just two weeks in which to accept, even though their product wasn’t changing for four months!  This is not acceptable, no one should be pressured to accept a deal and we have passed this example on to the industry trade body to review and take on.  However, some customers might accept this and go with the deal. This might be understandable but what if rates were to decrease in the next three months? There would be every good reason to be annoyed!  Always read the small print, do not panic and seek expert advice.

With this in mind, do you look at your financial budgets frequently?  A report from a well-known credit referencing agency has suggested that over 78% of mortgage people surveyed are not currently budgeting for a rate rise.  We all know rates will rise at some point, probably a while after Brexit, but nobody knows when exactly this will happen!  Many of those questioned did not know how much a rate rise would cost them on a monthly basis, despite many respondents believing rates would rise over the next twelve months!  A 1% rise on a £100,000 mortgage can increase the monthly payment by as much as £83.  As we go in to some months of uncertainty, and especially with regards to the cost of funding within the mortgage market, do make sure you are ready for all eventualities.

Whether you require the security of fixing your payments for an amount of time, or whether you are a bit of a risk taker and might look at a short to a medium term tracker, right now, there are some potentially great products in the market.

However, always shop around.  The initial rate may look good, but there might be hidden fees, large lender fees and early exit fees too!  There may be better options available to you elsewhere.

Another lender closes it's doors citing 'cost of funding'. Should we be worried?

I mentioned last week that the mortgage market is buoyant.  And it is.  However, there have been some ‘ripples’ in this with three well known lenders (in the specialist sector) closing their doors, or revisiting their funding options in the first quarter of the year.

Sadly, last week there was another casualty of the uncertainty of funding lines (and Brexit) that is facing us all as Magellan Homeloans shut their doors.  Being a local specialist lender, based in Leatherhead, this is a real shame as they considered mortgages for those with a credit blip, help to buy schemes and specialist buy to let.

The Lender’s CEO stated ‘The competitive landscape has continued to shift, mortgage loan interest rates are reducing when the cost of funding is rising, and some lenders are taking on more credit risk despite the volatile economic backdrop. Magellan has prided itself on maintaining excellent credit standards whilst helping customers who have been disenfranchised by high street lenders. However, we do not wish to compete in a market which we view as unsustainable.”

We obviously wish all their team well for the future.

Is this the start of further lenders pulling out of the market…..who knows?  But we are set for a long period of uncertainty and if you are looking to review your mortgage finances, maybe you shouldn’t hang around. 

Conversely, with some lenders recently reducing rates and chasing completion volumes, we are seeing more people being declined.  Not necessarily due to adverse credit, but because their credit score is not as high as they thought, and they don't meet the lenders requirements as a result.

Credit scoring is one of the most widely used means to assess a customer’s ability to obtain a mortgage.  All credit scores include a credit search – this is a review your financial history, payments to utility suppliers, mobile phones, etc.  The high street lenders, in the main, use credit scoring.  However, do your homework as many smaller lenders will offer just as attractive rates, but they will manually assess your ability to obtain a mortgage and use a human to assess your credit profile, rather than a computer aided credit score decision making system.  And make sure you deal with someone who has access to the whole market, so you get the best possible options for your requirements. 

Some lenders incurring delays due to some amazing deals being available!

The good news is that the mortgage market is really buoyant with good business volumes and mortgage product choice at its highest for some years.  There are some fantastic rates and opportunities for clients, especially pre Brexit.

The bad news is that this is causing a number of lenders major servicing problems as they do not have the staff to handle application numbers.  One we know of is working on applications submitted two weeks ago and once agreed, taking a further week to send out the mortgage offer!  We also have had delays on valuations with some surveyors taking up to two weeks to book an appointment. Unfortunately, lenders have agreements with certain surveyor companies, and they have to undertake the valuation, no matter what the delay in actually carrying out the appointment.  There is no shame in being open about these delays as they should be taken in to account whether buying or selling a property and this helps everyone manage expectations. 

In addition, an increasing number of valuations are coming back down valued.  This can cause immense problems and stress for the consumer as it could affect the overall loan borrowed.  Do your homework on the valuation before getting to application stage to ensure there’s no disappointment later on. 

Lenders and their valuers do not tend to accommodate a challenge to their valuation amount on the property.  Normally, the only times that a change to their original valuation amount occur, are when they have been supplied proof by the applicant of a recent sale (within a few months) and the property being located within a few hundred metres of the subject property!  Difficult indeed.

Finally, we are looking to recruit again.  Are you in the mortgage market, or have experience and fancy a new challenge?  If so, we would like to have a chat.  Pop in to the Carfax office, or please have a look at the job descriptions on our website to find out more.

Not all mortgage options and information is easily accessible

There’s a world of information and product availability in the mortgage sector.  But not all of it is as easily accessible to the consumer as it should be.

Did you know you can borrow 100% of the security property value?  Yes, you might need Mum & Dads help, or another guarantor who may put their property up as collateral or require their income to be used in the mortgage affordability calculation. But it can be done.

Did you know you can borrow up to 85% loan to value on a buy to let?  There are now a number of lenders in this space looking to assist those with maximising their mortgage on an investment property.

Did you know we now have lenders in the market with no maximum age limit?   Many people think that Equity Release (or interest roll up with no monthly payments) is the only way forward over a certain age.  Not so!  Lenders will take on board your circumstances, income, assets and liabilities and look to provide a normal mortgage, and possibly interest only, for the right scenario.  Terms and conditions obviously apply.

And there are so many more opportunities, if you know where to look for them.

We have had many mortgage customers approach us who have become frustrated in recent times due to local banks or building societies who are unable to see mortgage customers for a matter of weeks.  That could mean you lose your dream home in this ’difficult to come by’ property market as agents won’t wait.  Or the agent may insist that you see their ‘internal mortgage adviser’ who may only have access to a handful of lenders.  Therefore, you may not be offered all the wider market products available to you. 

This is where independent and whole of market brokerages come into their own.  They will be able to offer you access to a wide selection of lenders, including the high street names, and you only need to have one conversation with the same person.  In addition, they should have access to lenders who will manually assess your needs rather than a ‘computer says no’ type scenario, if required.  If I can also ‘plug’ a little, we also have access to a number of limited access lenders and exclusive products not readily available to the wider mortgage market!  Shop around, seek all your options and make sure your mortgage has the right ‘impact’...