Buy to Let may come under more scrutiny post MMR

No offence intended Jeremy and if you choose to selectively read what I write, then there's little point in me continuing this debate with you.

Your examples do not equate to a property investment. The sums of money are smaller and cars can be quickly sold to redeem any losses and the risks are less to the lender. A property is not so easy to dispose of and it can't be physically removed and reclaimed, like a car can.

All the debts you mention are unsecured debts (under £25K), and if you fail with them, then the irony is that payment could be secured via a charge on a property you own! Therefore lenders want to know you can afford the property before they lend to you and they want to know your exposure to other debt and if you have any payment failure history as this will indicate the risk involved in lending to you.

Let me ask you a question. Would you willingly rent out your property to a tenant based on them telling you they could afford it? i.e. doing no other checks. I don't think you would, but interested to hear if you would take someone's word that they could afford to pay your rent without doing any due diligence.

It's all about mitigating and managing risk and struggle to understand why you think that is such an evil thing.

Reply to the comment left by "Vanessa Warwick" at "07/03/2014 - 12:15":

You have some good points.

Thank you for acknowledging that. 🙂

Reply to the comment left by "Vanessa Warwick" at "07/03/2014 - 12:29":

You will be pleased to hear that I also agree with you on this one Vanessa.

If people were allowed to decide whether they could afford to buy a property and service the mortgage payments and the running costs the world would be in an even bigger mess than it is now.

Just imagine if BTL mortgages had no credit checks, no affordability checks, no interest cover criteria and 100% LTV was allowed. In 2007 were were not far from that and look at what happened a year later!

In my opinion the standard 125% interest cover rules are nowhere near tough enough. Given that ongoing costs, excluding mortgage interest, are typically around a third of rental income then interest cover should be at least 150% in my opinion. Even that doesn't factor in rate rises though so the next question is 150% interest cover based on what interest rate? My suggestion would be to assume a base rate of 5% plus the lenders agreed margin above that. It would probably restrict borrowing on your typical BTL flat to 60% but the real professionals would still be able to borrow higher amounts due to achieving higher yields.

I would also go on to add that common sense should be applied to a borrowers existing committments. They may have a huge personal mortgage arranged back in the days of non-status borrowing but no real way to service it. They may also be living of debt and credit cards. All this should also be factored in and that's what the challenger banks such as Shawbrook and Aldermore seem to be doing. Good luck to them I say 🙂
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Hi Guys,

This is taking me back to the old days when I still had rose tinted spectacles 🙂

My first mortgage application was aged 25 jointly with my fiance (now Mrs P) on my main residence purchase price £42,500 deposit £2,500.

We both worked for Barclays at the time and had to fill out a Staff mortgage application as you were not allowed to borrow any money outside the branch you worked at unless it was on Barclay Card.

It contained a full Budget Planner including petrol, insurance, gym, entertainment, holidays etc. This then had to get past the branch loans assessment desk and once rubber stamped by them we both had to have an interview with the Branch Manager. Lovely lady but a bit scary when I was just a pup.

She crossed questioned me on all my expenses figures, which I held up to manfully and she asked if I was sure I could afford it in a if you are wrong you will get the sack kind of a way.

The final question was "you are not married yet you know" ! But I had the answer with our wedding date booked, passed the test and bought my first house. Few.

Since then it has become a little easier lol 🙂

Although probably not now I am self employed !!!

Reply to the comment left by "Mark Alexander" at "07/03/2014 - 12:36":

Dear Mark,

Are you going to tell me, when you started in the 80's, that you didn't take out any high LTV, that you didn't take advantage of 100% mortgages, with all the fees and costs added to the mortgage?

If we had all bought one house, waited for it to rise by 25%, and saved for the next 25% deposit, we would have been waiting a damn long time to get the next 2, then wait and save for the next deposits....
Mark, I think if we did a calculation on the number of properties you have, I would hazard a guess it would take 50 years to do it that way and property prices would be £1,000,000 for a 2 bed semi !!

We have taken advantage of the slack lending to our advantage.....

Reply to the comment left by "Jeremy Smith" at "08/03/2014 - 20:02":

Hi Jerry, to have arrived at that conclusion you would have had to have made two massive assumptions; 1) being the number of properties I own and 2) my earning and expediture over the last 25 years.

With regards to lax lending criteria, well yes, I did take advantage of it but not until 2003 onwards until low margins and lax criteria became prevelant until 2008.

The key to this business is adapting to market conditions.
.

Reply to the comment left by "Mark Alexander" at "08/03/2014 - 22:32":

Hi Mark,

I knew you would take it in good spirit and pick up on the assumptions I had made !!
Of course, I don't know the extent of your investments, nor your earnings in your early days !!
My starting point is from just one deposit, and just extrapolating an example with just one property and a deposit of 25%.

Having now done some 'back of a very rough fag packet' (before someone else says it!!) calculations, (and this does not include any earnings invested), I have found that if house prices were to rise at a rate of 33% per year ( !! ), giving enough for a 25% deposit to be withdrawn from each and every property, it would take to the end of year 6 to have acquired 32 properties this way....
Having taken the first house at £100k, they would each then be worth around £515k at the end of year 6.
I would summize that if rates were to rise at 8%, it would then take 4 times as long, ie 24 years to accumulate 32 houses this way.

It is obvious that this is not a way that a property 'empire' can be built, and other factors need to be included to increase the rate of accumulation of properties.

Having earnings as spare cash to plough into the investment in housing is a huge benefit, which most who may be starting down the road of investment into housing may not have.
Obviously you need to have a job! and so be able to accumulate a deposit, but to multiply the number of investment properties takes a little more imaginative and creative accountancy in my opinion !!
- 100% mortgages were a great help, I must add.

And you are VERY right Mark: "The key to this business is adapting to market conditions"

Reply to the comment left by "Jeremy Smith" at "09/03/2014 - 00:00":

Hi Jerry

Please take a look at this excellent blog written by The Property Geek >>> http://www.propertygeek.net/theres-no-rush/

This is pretty much how I built my portfolio.

I also had very significant disposable income from my business.

I don't think people should consider investing unless they have significant cash reserves or the ability to support additional borrowing against equity in their homes.

My strategy was never reliant upon capital growth to build my portfolio but for obvious reasons, when it came along I utilised it.

As I learned more I found that I could add value to the right properties, then refinance my money back out to recycle my funds.

It is a combination of all of these things, plus selling property which you've added value to but doesn't make sense to hold due to low yield, which can also increase your ability to grown your portfolio.
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Reply to the comment left by "Mark Alexander" at "09/03/2014 - 09:30":

Yes, good article,
he makes it sound simple, and if all goes well, it can be.

I have found getting the right tenants is one of the keys to keeping the model on track.

Your last comment, "....doesn't make sense to hold due to low yield" is something I am struggling with presently:
..if I measure it as: income vs value of property (instead of against my investment)
then the huge increase in house values in the Cambridge area has led some of my properties to be yielding only around 3%.
Getting out is somewhat difficult without losing a huge chunk to the taxman, what's then left would probably yield about the same amount as before in cash terms.

- But this is off topic !

Rob's blog is a good example of why you should keep the day job, since when scrutiny comes by way of the mortgage company application you can demonstrate your ability to pay, whether rent is coming in or not.