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Buy to Let and the Changing Marketplace
The world of Buy to Let is currently going through a rapid & major change. Recent tax changes in the last few years, an emphasis on going green and the law with regards to EPCs and Energy Efficiency. Combining this now with the mini budget fiasco of late 2022 and a big increase in interest rates now mean that Buy to Lets are completely different to how they were even a year ago.
When looking at Buy to Lets it’s important to have an adviser that stays on top of these things to ensure that you are getting the right advice and that’s what The Mortgage Broker (Cambs) does best.
How Much Deposit Do I Need for a Buy to Let?
Most lenders in the Buy to Let marketplace would expect a 25% deposit. However there are some lenders that could consider an application with a 20% deposit. With that smaller deposit though you can expect to see a higher interest rate as well as a tougher stress test to pass due to the larger loan
What is Stress Testing on Buy to Lets?
Stress testing is one of the assessments that a lender will complete when considering your application. It is a calculation that works out how much rent you need to achieve to be able to borrow the amount of money you wish to buy.
As an example of a calculation in the marketplace today;
Loan x the Mortgage Interest Rate + 2% x 125% for a basic rate taxpayer or 145% for a higher rate taxpayer.
Someone wishing to borrow £150,000 at an interest rate of 5% would therefore go through this test;
£150,000 x 7% = £10,500 / 12 = £875 x 125% or 145%
This would make the required rents needed £1093.75 or £1268.75 per month based on those rates.
Why Has The Mini Budget Had Such an Impact?
After the mini budget announcement and the resultant changes in the marketplace the whole mortgage industry saw a big jump up in interest rates and this has had a big knock on impact on the stress tests.
Prior to the mini budget and with rates being lower. A common stress test was using an interest rate of 5.5% as opposed to the new higher rates being used.
When using the same loan above of £150,000. The calculation would look like;
£150,000 x 5.5% = £8250 / 12 = £687.50 x 125%/145% would make the required rental to be £859.38/£996.88 per month. This is an increase of £234.37/£271.87 a month in required rental income. A 27% increase in required rent! Which we most definitely haven’t seen in the rental marketplace.
All of this meaning it’s a lot harder to get the required loan.
Can My Income Be Taken Into Account?
If there is a shortfall between the rent you achieve/expect to achieve vs what a lender would need to lend the amount required then there are some options where they can take your income into account.
This is known as “Top Slicing” and not every lender will consider it so it’s important to speak to a Broker who understands the marketplace to reduce stress and get the right answer quickly.
Is There A Minimum Income Needed for Buy To Lets?
No, there is no minimum income that you need to earn to be able to look at a Buy to Let mortgage. As part of our process we will take your information and find the right lender for your situation.
Can I Buy a Buy To Let as a First Time Buyer?
Yes you can still buy a Buy to Let even if you are a First Time Buyer. There are a couple of additional checks that a lender will complete.
They will want to make sure that it is a true Buy to Let and that you don’t intend to live in the property yourself so they complete a sense check.
They look at where you are buying in comparison to where you live, they will look at the property, Does it make sense as a Buy to Let? These are checks just to make sure that you aren’t completing a “Back Door Residential” which is where you want to buy the home to live in for yourself but you wouldn’t pass the checks for a residential mortgage so you think doing it on a Buy to Let will make it easier.