Regulated buy to let – affordability check for tenants?

by Readers Question

8:26 AM, 18th November 2013
About 7 years ago

Regulated buy to let – affordability check for tenants?

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Regulated buy to let – affordability check for tenants?

I own a property on a residential mortgage. I am in the process of acquiring another property on a residential mortgage and I am looking to convert my existing mortgage into a regulated buy to let so that my parents can live in my old house. Having done a bit of research it looks as if a regulated buy to let is our only option, given the family connection.

The situation is a little more complicated because my parents will be unable to meet the full cost of the open market rent for the property. Therefore, I plan to support them by paying part of each month’s rent myself. Regulated buy to let

Having not been through this process before, is anyone be able to tell me whether the lender will check rental affordability for my parents? I am worried that on paper the rental figure will not look affordable for them, and therefore if a check is carried out the mortgage may be refused.

As stated above, I plan to support them by paying part of each month’s rent myself and I am comfortable that this would be financially sustainable on an ongoing basis.

Any advice would be great.

Thanks in advance.

Jack


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Comments

Mark Alexander

8:35 AM, 18th November 2013
About 7 years ago

Your research is absolutely spot on Jack, well done!

Your fears are unfounded though, mortgage lenders will not check whether your relatives can afford the rent. Regulated buy to let mortgages are underwritten on the basis of the borrower being able to afford the loan. In many cases, the personal expenditure of the borrower is taken into consideration as well as their income and the rental value of the property. In fact, far less emphasis on underwriting is on the property deal and far more emphasis on underwriting is focussed on the borrowers ability to pay.

Technically, the type of loan you are seeking is a regulated Let to Buy mortgage, not that there's is any difference between the two apart from the name. Your future circumstances will also be taken into consideration given that you are going to be letting your current home and presumably buying another with the benefit of a mortgage.

I strongly recommend that you seek whole of market mortgage advice. I'm sure some of our member brokers will comment on this thread so check out their member profiles where you will be able to make contact with them.

All the best with your move and congratulations on getting yourself into a position to be able to help your parents in this way. I'm sure they will be very grateful and very proud of you 🙂
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Mark Reynolds

9:21 AM, 18th November 2013
About 7 years ago

Hi Jack

As Mark states the mortgage company would not normally check the tenants affordability as in normal circumstances you buy the house then find the tenant - The only time this would be an issue is if you were to do a reference on your parents with a referencing company who will then check the affordability.

So assuming you are not going to reference your parents you should be fine

Regards

Simone Gilks (Mortgage Adviser)

9:47 AM, 18th November 2013
About 7 years ago

Morning, I must say there is now quite a flurry of enquiries for Regulated Buy To Let Advice on here at the moment.

Regulated Buy To Let mortgages are offered by a variety of Lenders, all of whom do not vet the tenants, as you might say. Instead they look at the open market rental and use this plus a number of other factors to calculate the affordability.

There are also a few lenders who would allow the mortgage contract to be written up as a " 2nd Home" by which it allows you to let relatives reside in the property. In fact there are number of ways in which this case could be looked at which is why I recommend you seek independent Mortgage advice at a very early stage.

One thing I would advise clients on should they be seeking to cover this level of debt, is ensure is that they take out adequate INSURANCE to protect themselves and their earnings as the last thing any client wants to happen is not be in a position to pay their mortgage payments as well their parents share.

That done, should you personally require further borrowing then any regular outgoings will be taken into account, such as you partially paying for the mortgage on the property your parents would reside in. This could REDUCE your ability to borrow quite significantly so again, please do take advice.

Please do check out my members profile, if you require any assistance.

Have a great day.

Simone

Mark Alexander

9:53 AM, 18th November 2013
About 7 years ago

Reply to the comment left by "Simone Gilks Adv CeMAP, CeCM" at "18/11/2013 - 09:47":

Getting a flurry of similar questions is the way it seems to work. People read one article about a certain niche and it raises more questions. Sometimes all articles seem to be about rent arrears and eviction, then somebody raises a question about HMO regulations and that sets a new trend for articles. This list of topics seems to be never ending. I used to worry about whether I would run out of things to write about at one time. I now realise I am under no pressure at all due to so many people asking so many questions 🙂
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Reader

10:04 AM, 18th November 2013
About 7 years ago

As a non broker it is good to read all this information.

As a landlord my lenders occasionally ask for the details of my rental accounts to check the continued affordability etc. I just wonder how long is it before the regulated buy to let lenders do the same, especially so if you hope to remortgage in the future.

Simone Gilks (Mortgage Adviser)

10:30 AM, 18th November 2013
About 7 years ago

Reply to the comment left by "Reader " at "18/11/2013 - 10:04":

Reader - Yes you are right, with Commercial Mortgages I am often required to calculate the overall affordability on an annual basis, this ensures that the clients portfolio is covering its self. This is when there can sometimes be complications. Properties may have reduced in value, rentals may have gone down, there may have been voids ect ect.....

For example - Last week a well known high street bank requested that a portfolio of Buy To Let properties be re-valued to monitor the Loan To Value ratio, I was then asked to produce the Income and Expenditure for this portfolio. Some of the properties had dropped in price and the LTV ratio was no longer within their lending limits so now we have to move the whole portfolio to another lender, as it was set up as a blanket 1st charge.

Now this does not happen very often and should they introduce something similar into the normal But to Let arena, we may all have a problem. But it highlights the need for monitoring your investments on a regular basis.

I am pleased to say that even though we first thought this would be a nightmare, I was able to secure a far better rate than the client already had as they did not take whole of market advice in the first place, instead they went straight to their bank and took their word as gospel!

Have a great day!

Mark Alexander

10:41 AM, 18th November 2013
About 7 years ago

Reply to the comment left by "Simone Gilks Adv CeMAP, CeCM" at "18/11/2013 - 10:30":

I used to see that scenario regularly Simone. Banks offering commercial facilities often include LTV and rental stress test covenants which can lead to technical default scenario's for borrowers. Wherever possible, when I was broking, I would advise my clients to avoid these types of facilities like the plague. Sadly, some people just don't see the value in taking professional advice until it's too late do they?
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Bob Nunn

11:02 AM, 18th November 2013
About 7 years ago

Jack I have just read your comment.
By supporting your parents with part payment of rent, you will be gifting them that amount of of rent. The tax man will want to Tax either you or your parents on this.
You will need to have an agreement drawn up to repay you parents monies that you owe them, through a Solicitor, to cover the amount your gifting.
Speak to your accountant, there is a tax liability on what you intend doing.
Be aware of this, hope it all goes well.

Simone Gilks (Mortgage Adviser)

11:33 AM, 18th November 2013
About 7 years ago

Bob - very good point! Never forget speaking to your accountant!

Mark Alexander

11:52 AM, 18th November 2013
About 7 years ago

Reply to the comment left by "Bob Nunn" at "18/11/2013 - 11:02":

Hi Bob

I did something very similar for my parents in that I paid them a regular monthly allowance to improve their standard of living and to allow them to retire 10 years early. There is no need to tell lies or to invent stories such as repayment of a loan which never existed. The process is relatively simple, the financial assistance being provided is from surplus taxed income. With the correct documentation the payments are not taxable. My accountant sorted this for me, see his member profile here >>> http://www.property118.com/member/?id=452

The above assumes that a payment is made to parents and then recovered, at least in part by charging rent. That wasn't what I did, I simply gave my parents money to supplement costs of living. A far simpler approach to the situation Jack has outlined might be to charge a reduced rent. I would also recommend taking advice on this before proceeding as there may be tax implications with this method.
.

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