We have spoken a lot in recent months about the impact of punitive government measures on landlords and the buy to let market. Following the PRAs implementation of detailed underwriting standards for the buy to let market on the 1st January 2017, even more barriers to entry are being created.
The PRA subjects buy to let investors to tougher restrictions and affordability checks, something which is particularly impactful for high net worth investors for a couple of reasons. Firstly, high net worth investors are likely to be purchasing high value property – in Prime Central London, for example – and the new rules will limit the amount they can borrow.
Secondly, wealthy buyers are likely to have a complex income stream from different global locations and sources. The new ways of underwriting mortgages may not consider a client’s entire financial situation.
However, there are still options available to help them; for example, we work with a lender who offers great options for investors who are both buying in their own name and in a limited company.
For those purchasing in their personal name, the monthly rental income must cover the mortgage payment by 140% if the client owns fewer than four properties, increasing to 155% if they own four or more. They also assume a stressed interest rate of 5.5% to protect the borrower should the Bank of England interest rate fluctuate upwards, or the initial rate plus 1.55%, ensuring the mortgage will be covered.
When buying as a limited company, the monthly rental income only needs to cover the mortgage payment by 125%, with the stress test remaining at 5.5%, or the initial rate product interest rate plus 1.55%. This allows the borrower to fully maximise the borrowing.
There is also the advantage of opting for a five-year fixed rate which will mean that the lender will only use a stressed interest rate of e.g. 4.19% (which is one of their five-year fixed rates), along with the above rental coverage percentages. This allows the client to maximise borrowing, whilst giving the lender security locking the client into the term so they won’t suffer from any rate increases.
This is particularly valuable for larger London properties which don’t have high rental yields – in Prime Central London, for example – allowing investors to borrow more. Furthermore, it’s a much more efficient option for wealthier buyers in a higher tax bracket, as a lot of lenders now use rental coverage percentages of up to 160%, dependent on the clients’ income tax level. They also use interest rate stress testing of up to 6%, stopping clients being able to purchase investment properties in London.
Get in touch to find out how our team of expert brokers can assist in maximising your buy to let portfolio, despite the recent restrictions placed on landlords.