Excessive rental income demanded for BTL loan- 2017 is this the new normal?

by Readers Question

10:43 AM, 9th January 2017
About 2 years ago

Excessive rental income demanded for BTL loan- 2017 is this the new normal?

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Excessive rental income demanded for BTL loan- 2017 is this the new normal?

I am interested in a Buy to Let flat in central London valued 625k. I would like to borrow 359k. I am told that equity levels are not as important as the rental income and to lend this amount, banks would require a minimum monthly rent of 2300 pounds pm.stress testing

However, the flat currently rents for 1700 pounds pm, which would appear to be the market rate for a one bed. Is this rental figure excessive on the banks part?

Are there better deals available or has the lending market tightened up that much?

Abigail



Comments

Neil Patterson

10:54 AM, 9th January 2017
About 2 years ago

Hi Abigail,

Please see >> https://www.property118.com/btl-much-can-borrow-pre-post-1st-jan-now-time-act/92277/

And our mortgage sourcing calculator >> https://www.property118.com/mortgage-sourcing/

Lots of people ask how the calculation works for the amount you can borrow after the new rules come into force 2017 regarding Buy to Let affordability testing.

To make it simple as a follow up to the example in the original article below:

The maximum you can borrow:
Pre January – 174.54 times your monthly rental income
Post January – 150.47 times your monthly rental income

The Prudential Regulation Authority (PRA) Consultation on landlord ‘affordability’ management is being implemented as guidance to lenders from the 1st of January.the clock is ticking

The PRA are requiring Buy to Let lenders to take into account borrower’s increased tax liabilities due to Section 24 mortgage interest relief reductions and other outgoings when assessing the amount of loan requested.

These changes don’t include limited company lending or like for like remortgages, but will affect all individual Buy to Let purchases and and any remortgage with a capital raising element.

Several lenders have already increased their interest cover ratio from the standard 125% to 145% and the minimum notional rate will be 5.5% unless fixed or capped for 5 or more years.

As an example if you wanted to borrow £100,000 stress tested for affordability at a notional rate of 5.5% and 125% interest cover (the percentage by which the rent has to be more than the interest charged on the loan) then the rental income from the property would have to be a minimum of £572.91 pcm

However if the interest cover figure is increased to 145% then the minimum rental figure required would be £664.58 pcm

From the 1st October 2017 the PRA are also intending to make underwriting applications for ‘Portfolio Landlords’ with 4 or more mortgaged properties much tighter with requirements of proof for true income. This we mean requiring copies of past tax returns, bank statements, rental accounts and SA302s.

Therefore if you are consider a Buy to Let application where the amount of loan required is close to the maximum allowed under current stress testing rules you need to consider getting your applications in now.

Sam Addison

12:23 PM, 9th January 2017
About 2 years ago

By my calculations 5.5% x 145% = 7.975%
Therefore , if you were able to borrow 100% of the property value you would have to rent it out at 8% p.a.
If you are buying a property in London and were able to get a rental return of 4% of value then you can only borrow 50% of value.
In the posters situation £1700 p.c.m on a £625k property = 3.264% so borrowing would be limited to £255k (3.264/8*625k) to meet the criteria.
I don't own property in or near London.

H B

13:02 PM, 9th January 2017
About 2 years ago

Reply to the comment left by "Sam Addison" at "09/01/2017 - 12:23":

In London, around 50% LTV will become the new norm.

Russell Thomas

15:31 PM, 9th January 2017
About 2 years ago

Just agreed a loan for 1m with Metro Bank. The rental didn't come up to criteria but they looked at my income and expenditure and used that. So you have to be good for the £500pm. Had to do a lot of paperwork. Wish you luck.

H B

21:07 PM, 9th January 2017
About 2 years ago

Reply to the comment left by "Russell Thomas" at "09/01/2017 - 15:31":

Was that agreed in 2017 or in 2016?

Russell Thomas

23:08 PM, 9th January 2017
About 2 years ago

Reply to the comment left by "H B" at "09/01/2017 - 21:07":

agreed 29/12/16

H B

7:13 AM, 10th January 2017
About 2 years ago

Reply to the comment left by "Russell Thomas" at "09/01/2017 - 23:08":

That puts it at the very end of the previous rules, but as of 1/1/17 there is a much tighter set of regulations in force.

They were introduced very quietly and the implications were really not that clear at the time that they were consulted upon, but the changes are likely to be quite profound.

The cash flow requirements are onerous and effectively mean tight limits on LTV. If you have a good LTV but a low cash flow, it is not going to help.

Ali Asgur

11:08 AM, 14th January 2017
About 2 years ago

The emphasis so far in this thread has been purchasing. Consider also that traditionally portfolios have been grown by remortgaging say every couple or so years. Now consider that even if the property were to achieve strong capital growth you would not be able to release that capital to the extent required - unless of course you sell but then you'd incur other taxes. The logical outcome of this and the higher taxes coming in is that there will be fewer rental homes. Ultimately, unless there are further legislative changes, I suspect that either rents will have to go up or property prices will have to come down. The impact will be higher when interest rates increase.

John Constant

8:43 AM, 16th January 2017
About 2 years ago

Lenders have taken very differing views with this new set of "challenges", but there are still lenders who are offering do-able rates and rental income coverage figures. As mentioned earlier, there are one or two lenders who are letting you borrow more, based on affordability from your personal income.

I am aware of one lender who can get to within £5,250 of the £359,000 required. This is a 5 year fixed rate and obviously other criteria applies too. If you would like to investigate this further, please contact HD Consultants via my member profile. There may well be others, after a period of research, who would meet the £359,000 required.


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