If you have a property and are looking to raise money against these assets, then you need to do it now. Here's why...

By James Mcgregor on Aug 16, 2017

This post mainly relates to the buy to let market and as of late there has been a lot of changes in this business area. 

There is a massive trend I am starting to see and this trend is the increased affordability stress tests the banks are starting to imply on buy to let mortgages. Due to the low rental yields in London the ease of raising against buy to let assets is becoming a lot harder. So let me explain...

So it seems the Government are leaning on the lenders to help crucify the buy to let market and now lenders are claiming to be 'protecting their customers' with these affordability assessments. Most lenders used to stress at a rate of 125% of 5% for 65% LTV products. What this means is as follows -

Property Value = £500,000  65% LTV = Borrowing of £325,00. So with old calculations to make this mortgage affordable the rental return would have to be £1,692 per month to make this buy to let mortgage affordable. This is calculated by taking the borrowed figure of £325,000/100 x 5 = £16,250 . This gives you the 5% figure of the stress test. Divide this figure by 12 to give you the monthly figure of £1,354. Then £1,354 x 1.25 = £1,692. the 1.25 is to give you the 125% stress test of the calculation.

Now all lenders are following a trend to increase this affordability assessment. The latest trend I have seen is to stress at a rate of 145% of 5% for 65% LTV products. So on exactly the same property the monthly rental yield would have to be £1,963 to raise the same mortgage. Do exactly the same calculation as above but change the last section to times the figure by 1.45 instead of 1.25.  (please note each lender will have there own stress test affordability, this is being used as an example).

So with the old calculation on a £1,000,000 property being rented for £3,333 (4% yield) you would be able to raise £640,000. Again on the same property with the new calculation you would only be able to raise £550,000. This is a huge difference, taking your maximum LTV from 64% down to 55%.

There is currently a small selection of lenders that still use the old calculations but these are reducing by the week. This is why  if you are looking to release equity it may be worth sitting down to look at your own portfolio and put a plan together for the next couple of years at least. As today would be the maximum you will be able to raise out of your assets for the foreseeable future. I believe this stress test trend will keep on getting harder and for London market at least you will find only 40-50% LTV BTL mortgages will fit in the near future. This is also huge if you have current buy to lets you are looking to re-mortgage. There will be a lot of BTL owners that will have no other option when their deal finishes due to this increasing change of criteria.

I can imagine that this will lead to one thing, increased rent. The reason for this is land lords will be forced to increase rent due to not only this but also not being able to offset interest against their rental income on tax returns. Putting them even further out of pocket. All these losses will have to be accounted for somewhere and it seems the rental population will suffer, in turn the property market will become an easier playground for the high net worth and ultra high net worth with less competition in the market.

If you have any questions, as always feel free to get in touch at James@mesafc.co.uk

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