Whilst it is generally well understood that the days of making a ‘quick profit’ from buy to let “BTL” are over, for seasoned landlords and well-advised new landlords who take a long-term view, the current market conditions could provide an opportunity to make new acquisitions. With rents rising significantly and property prices stagnating/falling, opportunistic acquisitions may emerge. How do potential buyers take advantage?
Do your research!
Understanding the local rental demand is crucial as rental income is a key driver to the level of mortgage a landlord will be able to secure. As part of the mortgage and loan to value (‘LTV’) approval process, lenders need to understand the borrower’s affordability. For BTL mortgages, affordability is typically assessed by looking at the Income Coverage Ratio ‘ICR’. Most lenders apply a formulaic approach which takes into consideration gross rental income, borrower’s income tax bracket, monthly mortgage payments (including a potential increase in interest rates) and property maintenance costs.
With most employers continuing to offer flexible working and rapidly rising rents in the major city centres, tenants are increasingly moving further away from their place of work. Consequently, rental demand for properties further away from central city locations has improved, thereby potentially making properties in these locations, which tend to be cheaper, more attractive for investors.
Thought needs to be given on whether the property is purchased in:
- personal name;
- joint name (maybe with a spouse/family member);
- a property partnership; or
- through a UK investment company.
Along with personal and tax considerations, the type of property/tenant (e.g. single AST, HMO, student) may also influence the holding structure.
The property ownership structure may also have an impact on the type of lender/mortgage product and the LTV attained as ICR calculations may differ across ownership structures.
Improving lender flexibility
During this period of high interest rates, landlords have found it challenging to secure their desired level of mortgage finance. To assist landlords, some lenders have reacted by introducing new initiatives and more flexible products:
- use of landlord’s excess non-rental income to support affordability criteria and therefore higher LTVs – ‘top slicing’;
- lower interest rates (and hence lower ICR) on mortgage products with higher arrangement fees, thereby facilitating higher LTVs;
- a blended lower ICR where property is jointly owned.
Fixed v Variable
The decision in September and November by the Bank of England to keep the Bank Base rate at 5.25% has created an expectation that there are unlikely to be many more rate rises, and that indeed interest rates may fall next year. With such an environment, the Kinnison team are increasingly having the debate with clients on whether to apply for a fixed rate or a variable rate mortgage. The type of product you select will depend on a number of factors including:
- your ability to cope with fluctuating monthly payments;
- your opinion on when interest rates may begin to fall;
- the level of LTV you require.
Get in touch
Whether you are an existing landlord looking to add to your portfolio/refinance any existing properties or a prospective new landlord, please get in touch with the Kinnison team to discuss your financing and structuring options:
Call: 0203 871 2823