How might lowering rent impact my ability to remortgage?

by Readers Question

8:47 AM, 18th March 2016
About 3 years ago

How might lowering rent impact my ability to remortgage?

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How might lowering rent impact my ability to remortgage?

I have a very good long term tenant, not one rent payment ever late, property kept well, always polite & easy to get along with, understanding and cooperative over maintenance etc.money house

He has a good steady job with reasonable salary, but his girlfriend, who wasn’t on the AST, has just moved out. She wasn’t contributing toward the rent, but he tells me she paid the utilities. Without her contribution, he would struggle to continue affording the rent, and although he doesn’t want to move out, has offered to.

We checked if he can get housing benefit, but he earns too much.

Now, I know I am within my rights to serve notice on him, and he would move out – but I don’t want to do that. What I need to know is how lowering his rent would impact upon my ability to remortgage the property in future, which I will definitely need to do?

On an earlier post on Property118, Neil Patterson defines the rental income assessment as being “The monthly rental income a property should achieve as assessed on a valuation survey” do lenders only look at that, or do they take the actual rental income into account too?

For the record, the lower rent would still be within market rates but only just, and I would be able to afford the maintenance, although would be making little profit. At the moment, property is mortgaged with a large BTL lender at 75% LTV with 3.54% interest rate, fixed until next year when I will need to remortgage.

Thanks for any advice.

Anne



Comments

Neil Patterson

9:00 AM, 18th March 2016
About 3 years ago

Hi Anne,

Most lenders will rely on the rental assessment given to them by the surveyor when the valuation survey is carried out on their behalf.

However in a remortgage the current rental income could be considered a factor by some lenders and on an application you will be asked to include rental income. That is why it is best to seek advice from a whole of market broker that understands how lenders view applications and criteria.

Rental stress testing is often worked out using:

An Interest Cover figure - the percentage by which the monthly rental income has to cover the monthly mortgage interest only payments. This is often 125% but can go up to 150%

Notional Rate - the rate the stress testing calculates the interest only payments eg. the mortgage rate payable may only be 3% but the Notional rate may be 5%.

Therefore with an interest cover figure of 125% and notional rate of 5% you can borrow £192 for every £1 of monthly rental income.

You may very well have enough income to cover the remortgage even on the lower amount, but this would need to be checked against lenders criteria.

Mandy Thomson

9:43 AM, 19th March 2016
About 3 years ago

Reply to the comment left by "Neil Patterson" at "18/03/2016 - 09:00":

It's interesting - I hadn't considered the ability to remortgage in this sort of situation. Would Anne therefore be advised to simply write to her tenant and offer him a temporary reduction that still keeps the rent within the 125% minimum, and perhaps review it going forward?

If the tenant needs a reduction even lower than this amount or for longer (assuming of course that she can afford it, and there is plenty of trust between the Anne and her tenant) what would you say if they simply have an informal agreement that he will pay her X amount, but keep the rent officially at the original amount?

This also begs another question: how might such an informal understanding affect RGI? Could it invalidate any policy she has?

Good tenants turning "bad", particularly after major setbacks, unfortunately isn't unheard of, as Mark (Alexander) has written about: http://www.property118.com/perfect-tenant-evicted-prostitute/29056/comment-page-2/#comments

Chris Byways

14:01 PM, 19th March 2016
About 3 years ago

You could consider a non-contractual 'rent holiday', for one or two months, or weeks, which keeps the nominal rent the same, allows it to return, and should have less effect on any mortgage application. The DCLG model tenancy allows for this possibility iirc.

Mandy Thomson

14:09 PM, 19th March 2016
About 3 years ago

Reply to the comment left by "Chris Byways" at "19/03/2016 - 14:01":

That's a good idea, but it assumes that Anne can take the hit of no rent for one - two months, and also assumes her tenant is prudent in his financial affairs during that time.

What if she perhaps paid her tenant's utility bills and council tax, leaving the rent as it is? Also, if her tenant is reasonably handy and house proud, perhaps he could do some jobs in the property instead of Anne paying specialists for, and she in turn pays him labour and materials?

ian

16:45 PM, 19th March 2016
About 3 years ago

Has he got a friend to rent a room to, if you would allow ?

17:30 PM, 21st March 2016
About 3 years ago

Thanks everyone for your helpful suggestions.

@Ian I agree that this might normally be an option, but he doesn't have a spare room and at the moment is getting over the breakup, so wants his space.

We have come to an agreement, which is that we leave the AST alone and rent alone, but I will pay his council tax.


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