What does BTL rentals stacking up mean?

Filed by Brett Alegre-Wood on Tuesday 2nd August, 2005 in Buying Off the Plan Property, Mortgage and Finance, Letting your Property, Capital Considerations, Cash Flow Considerations, Investment Strategy, Conveyancing and Solicitors, Property Investment Clubs
Brett Alegre-Wood
Chairman, YPC Group

Hey guys,

OK, time for a mathematics session so grab your calculator.

Unlike buying your own home where a funder will look at the income you earn and assess your ability to repay. A buy to let mortgage works profoundly differently.

Now each funder has different criteria to determine how much they will lend you for a property and this in most cases is based on the market rent that the valuer puts down on their valuation report to the funder.

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Lets assume that the valuer put down £500 per month rent. Now lets consider how much you could borrow with different lenders.

Lender 1 criteria
Calculates 100% coverage at 6%.

Lender 2 criteria
Calculates 125% coverage at 6%.

Lender 3 criteria
Calculates 130% coverage at pay rate. Pay rate means the actual interest rate you will be paying on your mortgage. Let's say 4.99%

Therefore at £500 per month rent using this criteria.

Lender 1
£500 x 12 mths= £6000 @ 6% = £100,000.

So £100,000 would be the maximum loan allowable and £117,650 (£100,000 @ 85%) would be the maximum property price if you wanted to input only 15% based on the rent.

Lender 2

£500 x 12mths = £6000 @ 6% = £100,000 (125%=£80,000)

So £80,000 would be the maximum loan allowable and £94,115 (£80,000 @ 85%) would be the maximum property price if you wanted to input only 15% based on the rent.

Lender 3

£500 x 12mths = £6000 @ 4.99% = £124,240 (130%= £92,492)

So £92,492 would be the maximum loan allowable and £108,814 (£92,492 @ 85%) would be the maximum property price if you wanted to input only 15% based on the rent.

So based on our 3 lenders' criteria the best lender in terms of rental stacking up would be lender 1 then 3 then 2.

So lets imagine the property price was £100,000.

Consider which lenders you could use. Based on the above you could use all the lenders.

Lender 1 and 3 would be happy if you just put in the 15%.

Now (this is important) you could also use Lender 2, you would just be required to put in an extra £?7,508 (£100,000-£92,492). Now remember that is £7508 on top of your 15% deposit of £14,323. So your total investment would be £21,831 if you use lender 2 against £15,000 for lender 1 and 2.

So this bids the question should I use Lender 1, 2 or 3. Now that's a question for your Portfolio Manager and Mortgage Broker.

It will depend on the more specific lending criteria of each funder and the portfolio strategies to be employed.

One final thought - Just because you have to put more of a deposit in with Lender 2 doesn't mean it's bad. In fact by putting more of a deposit in will mean your repayments are lower and therefore it eases your cashflow. You would of course need to have the extra initial capital available otherwise you could not use lender 2.

Live with passion,

Brett Wood

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