Why 5 year fixed rate Limited Company mortgages are so popularMake Text Bigger
Earlier this year (2018) mortgage lenders were forced to tighten up their affordability criteria.
Since then, LTV has rarely been the restricting factor when it comes to BTL borrowing. Instead, the level of borrowing has become more restricted based on “affordability calculations”.
This is because lenders are now required to apply a stress test of 145% interest cover at a 5.5% notional rate to all new BTL mortgage applications. A simplified version of this equation is 150 times your gross monthly rental income.
However, it doesn’t end there!
The 150 X monthly rent calculation doesn’t only apply to the property you are looking to buy or remortgage. If you own 4 or more properties it also applies to your whole property portfolio. Some landlords have done this calculation, only to find that if they wanted to remortgage their portfolio they would have to pay down their mortgages first. Others have looked into buying another property and have been told the maximum mortgage available is a minus figure!
For private landlords (including partnerships and LLP’s) which might well be affected by the Section 24 restrictions on finance cost relief, lenders also need to factor the new tax regime into their calculations when considering affordability. This provides the perfect excuse for a lazy mortgage underwriter to decline a deal which they consider to be ‘a bit tight’.
Mortgage lenders don’t need to consider Section 24 when they are lending to Limited Company mortgages. I suspect they rather like this because, let’s face it, they are not trained tax consultants! Also, like us all, they prefer an easier life too! Who wants this extra work, save perhaps for the regulators and accountants?
Also, lenders do not have to apply the 5.5% notional rate if the mortgage is fixed for 5 or more years. For example, if a landlord is looking to refinance his whole portfolio onto a five year fixed rate of 3.5%, the monthly rent multiple which determines the maximum loan based on affordability shoots up to 236.
And that’s why there has been a huge swing in the popularity in terms of new BTL mortgage applications for 5 year fixed rates to Limited Companies.
Here is a worked example
- Bob owns 15 BTL properties
- Value £2,250,000
- Gross monthly rent £9,388 (i.e. 5% gross yield)
- Outstanding mortgages £1,502,800 (i.e. 66.75% LTV)
- Bob needs to remortgage his whole portfolio because he is coming to the end of his mortgage term with Mortgage Express (now Rosinca), and they are unable to extend the term
- He is attracted to a 2.99% three-year fixed rate his broker has told him about
- Based on the affordability criteria, Bob would have to pay his mortgages down by £93,880 before he could take up this deal
- However, if Bob was to take a 3.5% five year fixed rate he could borrow £1,687,500. That’s £184,700 more than he is borrowing already. In fact, the only restriction on Bob is the 75% LTV criteria imposed by the lender. He is well within the “affordability criteria”. Also, as Bob’s properties are in a Limited Company, his mortgage application flies though very quickly, because the mortgage lender’s credit committee doesn’t need to consider the impact of the Section 24 restrictions on finance cost relief.