Why landlords in Bow must learn new mortgage rules
First-time property investors and experienced landlords looking to buy rental homes in East London need to get to grips with how buy-to-let mortgages work.
Despite a 3% stamp duty surcharge on second homes being introduced in April, a widespread reduction in mortgage rates has given the buy-to-let market in and around Bow a much-needed boost.
However, UK-based investors looking for a BTL property within easy reach of the City and Queen Mary’s University need to take into account five key lending criteria before applying to take out a landlord mortgage.
1 Loan to value ratio
A lender’s LTV determines how much an investor can borrow in relation to a rental property’s purchase price. While BTL lenders offer maximum LTV ratios of 75% or higher, the best rates are reserved for investors taking out a loan with an LTV ratio of 65% or lower. This means that if an investor wanted to purchase a one-bedroom apartment in Shoreditch for £375,000, a lender would only offer their most competitive rates on a £243,750 BTL mortgage.
A further consideration when it comes to LTV ratio is the size of the home loan. Many BTL mortgage providers reduce the LTV ratio to 50% if the mortgage value is £1.5m or over.
2 Interest coverage ratio requirements
To make sure an investor can afford to keep up the repayments on a buy-to-let mortgage, lenders look at the relationship between the rental income a property generates and the cost of the home loan.
This follows Chancellor George Osborne unveiling a tax change in 2015 that will remove landlords’ ability to deduct the cost of their mortgage interest from their rental income when they calculate a profit on which to pay tax.
In effect, this means landlords will be taxed on their turnover rather than their profit and has led mortgage providers to increase their BTL interest coverage ratio from 125% to 140%.
If the interest payable on a £243,750 BTL mortgage is £599 per calendar month, the property in Columbia Road would need to generate a rental income of at least £870 each month to meet the 140% interest coverage ratio requirement.
3 Non-property related income
In addition to the income a property investment can generate, many BTL mortgage lenders require investors to be able to prove they have a minimum pre-tax income of at least £30,000 per year for a single applicant or £50,000 per year for joint applicants. This condition, in addition to other affordability criteria, is most commonly applied to first-time landlords.
For first-time property investors whose income comes from self-employment, lenders will usually require a minimum trading period of at least 12 months.
Other points that borrowers need to consider before applying for any mortgage is the need to improve their credit score. Self-styled money saving expert Martyn Lewis advises: “The credit landscape has shifted towards ‘rate for risk’. This means almost every mortgage provider uses your credit file to not only dictate whether they’ll provide you with credit, but also what rate you’ll get.”
4 Primary property ownership status
A growing number of landlord mortgage providers require first-time property investors to be homeowners, and to have paid their mortgage without any problems for at least 12 months.
5 Your age
With a growing number of investors aged 55 or over using their net income from BTL property to fund their retirement, landlord mortgage providers are increasing the upper age limit for borrowers at the end of the loan period to a maximum of 85, while loan terms are also rising to up to 40 years.
Every BTL mortgage provider attaches different terms and conditions to their property loans and the information above is intended to act only as a guide to the factors to consider when seeking finance to fund an investment property purchase.
Peach Properties takes no responsibility for any of the above information not applying to each individual lender and advises all property investors to seek advice from a suitably qualified financial adviser before committing to a property purchase.
However, as specialists in east London property, we can advise BTL investors on which homes in and near Victoria Park, Bow, Shoreditch, Mile End and Hackney will meet your investment requirements. For more information on BTL properties in east London, contact Peach Properties today.
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