The Trouble With London Rent to Mortgage Calculations
Anyone who has ever looked to invest in property in the capital has run into the problem of London rent to mortgage calculations. The soaring price of property has far exceeded the rise in rental rates and this has left many Buy to Let (BTL) investors having to find ever-increasing deposits in order to secure property in this area. In this post, I will be looking at some of the options available to combat this problem and consider why more lenders don’t have different rules for within the M25.
You may be aware that a rent to mortgage calculation is a simple equation to determine the maximum loan available from a given rental figure. Lenders want to ensure that the rent will comfortably cover the mortgage repayments on interest only, as well as allowing for some extra to cover maintenance. What a lot of people don’t realise is that this is done based on what the interest might be after you finish your new low rate deal and, in many cases, these figures are around 5% to 6%. Recently, more and more lenders have been adopting this approach and it is having a severe effect on those trying to remortgage existing BTL investments or looking to buy new ones.
As an example, we can look at a property valued at around £600,000, In London most likely a two- bedroom apartment, and the rent may be around £1,500 to £2,000 per month. Taking the lowest of the available interest rates, 5%, and the highest rental figure, this still leaves the maximum loan at only £384,000. This is just a 64% loan to value (LTV) rate whereas typical BTL mortgages across the country are available up to 75%. Whilst new buyers will find they need to look very carefully or reduce their intended budget to minimise their capital investments, those who already own properties and are looking to remortgage them might find it much harder than it was two or three years ago. But there are a few exceptions to the rule. For instance, some lenders will take the actual rate of interest paid into account for rent to mortgage calculations, whilst others have some more innovative features that allow for a greater amount of flexibility.
Clydesdale Bank is an example of the former lender. They allow the use of the pay rate, which at time of print would allow a maximum loan of £509,000, far in excess of the 75% loan threshold and £125,000 more than most other lenders. However, there is a catch of course: Clydesdale do have a few limiting criteria. For instance, if you choose a repayment mortgage, they will assess the rental cover based on this rather than on interest only. They will typically only lend up to 4.5 times of the lender’s salary, and you must earn a minimum of £25,000 per annum. For most people able to invest in London, though, these shouldn’t be too restrictive and there are a few other advantages that outweigh these limitations. Clydesdale allow up to 70% LTV on new build flats, 80% on BTL – but only on repayment, bearing in mind the rental limitations as a result – and they will allow up to eight properties in the background if you earn over £75,000 per annum.
Precise Mortgages is another lender with a similar approach. If you choose one of their lifetime base rate trackers, you could borrow up to £481,000, still more than enough to get to 75%. Precise have no minimum income requirements, although they will consider income and require enough to comfortably cover personal expenditure. They will also consider first time landlords and will lend up to the age of 85. However, out of many hundreds of products Clydesdale and Precise have between them, we have just half a dozen to choose from which doesn’t leave much margin for error.
Woolwich, on the other hand, offer a more innovate approach. They have a web-based affordability calculator and will allow clients to use surplus personal income to make up the difference. The client’s personal income, existing mortgage payments, number of dependants all factor into the mix, but as long as there is enough left over, Woolwich will allow a client to borrow more than their own punishing (£125,000 at 5.75%) rental calculation.
So three lenders out of perhaps fifty options will lend over the industry standard 5%. What puzzles me is how the industry itself has become so homogenised. Why don’t more lenders seek innovate ways to separate themselves from the competition? Currently they are in a race to the bottom in a price war that has to grind to a halt very soon. The cheapest BTL rates currently availableare around the 2% mark – how much further can lenders go and still be able to keep the lights on at the office? Hopefully, when the bottom line is within reach, lenders will be forced to innovate to continue to attract more customers, and that can only be a good thing for borrowers.