The standard affordability assessment for buy-to-let is based on the rental income using each property on a stand-alone basis, says Bob Young, chief executive of Fleet Mortgages. I
If the property is a multiple let, i.e. a HMO, Mr Young says it is usual to base the rental income on a per room basis. In either case, the valuer should be asked to look for a ‘sustainable’ rental value.
Charles Haresnape, managing director of mortgages and commercial lending at Aldermore, says lenders will typically apply a ‘stress rate’ to ensure that the applicant’s loan will remain affordable following any interest rate increases.
Minimum income requirements will also generally apply to ensure that applicants are also able to mitigate void periods, Mr Haresnape adds.
Dale Jannels, managing director of Atom, agrees that despite the perception that income is irrelevant some lenders do now require a minimum income in order to obtain a buy-to-let and most require customers to be home owners.
But in the main, he says lenders will rely on the valuer’s rental assessment of the property when calculating the loan available.
Normally this is at 125 per cent of a nominal 5 per cent interest rate, although Mr Jannels says some will also stress test at rates up to 7 per cent. He adds we are now seeing a number of lenders look at a pay rate in the 3 per cent region and some have lowered their rate check calculation to 110 per cent.
In terms of the impact of an increase in mortgage rates, Mr Jannels says without a corresponding increase in rental this movement would eat in to the landlord’s rental yield surplus.
On the subject of the impact of an increase in the base rate, Aldermore’s Mr Haresnape says the majority of landlords will need to consider how this would affect their current borrowing, affordability and ability to continue to prosper as a landlord.
Fleet Mortgages’ Mr Young says an increase in the base rate will likely take the rental calculation figure up as this usually reflects the revert rate, which has some link to Libor and/or base rate.
Pension impact
In terms of the impact of greater access to pension cash, Mr Young says the jury is very much still out.
He says: “Some believe pensioners will be drawing down their entire pots immediately to invest in the buy-to-let sector and while I suspect some will want to do this, there will be limiting factors to how much demand for investment property will be fuelled by this.
“The simple fact is that many people’s pension pots are too small to allow them to invest anyway while other will not want to become involved in such an investment.
“My view is that a small number of pensioners will look at doing this however whether this develops into a significant number of new ‘pensioner landlords’ is much less likely.”
Some have said pensioners may seek to get around the issue of prices by using a lump sum from their pension as a sizable deposit for the mortgage, possible as the lack of MMR affordability tests means lending into retirement is less restricted.
Aldermore’s Mr Haresnape says what is clear is the buy-to-let market is likely to see increasing activity over the next few years as lenders and buyers adjust to changing demographics and market conditions.
He says the pension freedoms are likely to lead to some additional investment in buy-to-let. However, Mr Haresnape warns it is important for any adviser to ensure their clients understand that buy-to-let is not the get rich quick solution they may anticipate.
Proper planning and a robust exit strategy will go a long way to making sure that no one is caught out by the realities of their investment, he points out.
