Lender Considerations for Buy to Let Mortgages
As with a residential mortgage, the main limiting factor restricting the amount that can be borrowed is the Loan to Value (LTV) set by the lender. A lender will set a maximum of say 75% of the purchase price, thus requiring a client contribution of 25% sat with their solicitor prior to the lenders releasing their funds.
The second limiting factor determining what can be borrowed is the rent either expected, or being paid, that the security generates per month. The calculated loan payment will have to be covered by the rent generated usually above and beyond the loan payment itself. Generally, a lender will ask for rental coverage 120-140% of the actual loan payment per month.
These two factors, the LTV and the rental yield are the primary restrictions on what can be borrowed against any given security. They are a starting point but there are other variables that affect the amount of loan available, or even if a loan is possible at all; some of which are as follows.
Purchase Vs Refinance
In the current market, lenders consider the usage of a Buy to let Loan quite differently for acquisition than for refinance with almost all current lenders stipulating a minimum period of 6 months ownership of a security before that security can be used to raise a buy to let mortgage against it.
This reflects the decision to move away from funding a higher percentage of properties purchased under market value effectively preventing the funding of back to back/ same day re-mortgage deals which were so common in the past.
This six month ownership period is also required if the property is transferred to someone one else in a “paper transaction” or if a new lease has been set-up or if a new build property has just been completed and signed off. There are some products available to assist with quicker refinances but only against the purchase price not a “true” market value and the general tendency is towards a six-month waiting period.
The Borrower Themselves
Although a buy to let mortgage focuses to a great extent on the asset being financed, the borrower is still considered during the lenders underwriting. Certain products will stipulate that the borrower must have a minimum income level to cover any issues of voids and the normal level asked for is £25,000 per annum for a sole applicant, although some lenders will consider less.
Near-prime products on significantly higher rates may be offered to an applicant with any form of mortgage arrears from within the past 36 months, CCJ’s and late payments – but the vast majority of lenders are looking for a wholly clean credit profile across the last 7 years.
It is also worth noting that certain lenders to certain occupations with builders/property developers generally finding it harder to source products than those who derive an income outside of this occupation.
Lending to an Individual or in a Company Name.
Whether the company is a trading company or an SPV set-up solely for the buy to let management, lenders have always restricted specific products to those properties owned in a company name. Changes to taxation for individuals now means that more products are available to limited company purchases, although ideally, these need to be formed with ‘letting based’ SIC codes.
Purchases or refinancing within trading companies will bring a reduced market to the client but can be achieved.
HMO’s / Holiday Lets & Flats
The type of security used for a buy to let mortgage also affects what, if any, loans are available. Houses of Multiple Occupancy consist of rooms with shared cooking/bathing facilities all on the same freehold, holiday lets are those properties where certain covenants on the title restrict tenancy to short term accommodation – both of which tend to generate higher rents but also higher vacancies.
Currently, there is restricted buy to let loans for HMO’s, and for holiday lets. Again, as with lending to a company, the alternate way of implementing finance is with a commercial loan instead of a buy to let mortgage. Generally, applicants must have previous BTL experience prior to finding funding for an HMO purchase and then there may be restrictions on size (6 beds or less).
Please also note that buy to let lenders view any property with more than one tenant as an HMO, whereas the Local Authority will view an HMO only as a property that has over 5 tenants and / or 3 floors. The former is generally labelled a non-licensed HMO with the latter a licensed HMO requiring planning permission and a licensed borrower. Local Authorities have areas set-up called “Article 4 areas” specifically mapped out in areas that the council does not wish to see a proliferation of HMO properties.
If it is an Article 4 area and it’s a new HMO the client will be unlikely to obtain consent for the HMO (even non-licensed) but if they do persuade the LA then there may be an added value to this property above and beyond its bricks and mortar value (see yield value). If the property has been an HMO since prior to 2013 and this can be proved the property has an automatic consent to be run as an HMO.
As mentioned above one of the restricting factors that determine the level of lend is the Loan to Value against the property, and one way to increase this is by changing the concept of what constitutes the “value” of the property.
Most lenders consider the value of the property as its value as a “bricks and mortar” asset i.e. if it was to be sold on what would be the physical value of the property. However, certain lenders will also consider the trading value of the asset and determine the value by the “yield” that it generates.
This only tends to be considered with HMO’s whose yields are substantially higher than if the asset was used as a single let tenancy and in generating more money the argument goes, the asset is worth more money. Run as an HMO generating a higher yield its value is also higher.
Most lenders will only consider the asset to be worth what it would if repossessed and sold on which reverts the asset to an MV3 property value only, but if a lender can get comfortable with the applicant and the uniqueness of the asset then they may consider a valuation on the yield basis and so a higher level of loan.
This is a very complex subject but in brief, if the applicant has a lot of HMO experience, runs their properties as a business giving the lender comfort that this business will continue, and if the asset has a value that cannot be replicated in another property near to it then and only then, a yield lend may be possible.
If the type of asset that the loan will be secured against falls into the lenders ‘new build’ category then, in general, the amount of money that can be secured against it will tend to fall between 5-10% of the lender’s normal maximum criteria. This reflects the heavy discounting and rapid price reductions that come with new build properties.
Each lender has slightly different criteria for how long a property is classed as new build and these can be worked around to try and increase the loan available for a client but with policy changing all the time each case has to be looked on as a case by case basis.
If the loan will be a refinance to remove a development loan, then lenders will also have restrictions on their exposure within a single development. Certain lenders will, for example, restrict the number of loans to 6 within a single postcode or 20-25% of any development.
Buy to Let lenders have allowed in the past a series of loans across multiple units to be split across several lenders but are currently reluctant to get involved with these types of projects.