Coming out of the financial crisis the buy-to-let mortgage marketplace has been a major success story. The Bank of England recently published data showing buy-to-let lending has increased by 40% since 2008 compared to 2% for residential lending.
Thinking of purchasing your first BTL Property? Most lenders will impose ‘minimum qualifying criteria’ for individuals looking to secure finance: owner occupier of your own residential property & earning minimum of £25k PA. Providing you achieve the ‘minimum’ criteria the lending decision will be entirely based on the ‘anticipated rental income’ for the property you are looking to purchase.
The calculation used by the majority of lenders works as follows:
((Loan Amount X 5%) 125%) / 12
((£375,000 X 5%) 125%) /12
= £1953.12pcm ‘minimum required rental income PCM’
I.e. if you are looking to purchase a property for £500k at 75% LTV the property needs to achieve an annual yield of at least 4.68%.
Easy right? Unfortunately not, any discerning, London-based landlord will know achieving a yield north of 4% PA has become tricky! The simple fact is rents have not been able to keep pace with the double-digit, year-on-year growth experienced in the property market. This has made it more difficult for landlords within the M25 to secure finance at higher LTV’s.
However, for high-income earners a number of options have recently opened up which will allow buyers to secure finance at 75% LTV. Lenders such as Clydesdale Bank re-entered the market with a 2.99% fixed-rate product (available to 75% LTV) which is a viable option providing the property achieves a yield of 2.80%. As well as this, Woolwich Mortgages can now take a ‘top-slice’ of applicants earned-income into consideration to help meet perceived ‘rental income shortfalls’. This market-shift will make it easier for landlords to once again buy investment property at higher LTV’s. A number of other high-street/challenger lenders are looking to adopt the ‘top-slice’ policy pioneered by Woolwich/Barclays to help borrowers circumvent the more difficult ‘rental income calculation’ imposed by the majority of lenders.