The client is a full-time landlord with a large portfolio of rental properties.
He was looking for a 75% loan to value mortgage to buy a 2-bed terraced house in London priced at £300,000. Unfortunately the expected rent of £1,000 pcm meant that the case would not meet the rent to interest (RTI) calculation of most lenders, so the choice of finance was limited. (See below for more details on RTI). The scenario was further complicated by the fact that the landlord’s sole income is from rent and he has in excess of 10 mortgaged buy to let properties.
We approached one of the new, specialist lenders that caters to the finance needs of more experienced landlords with large portfolios. Crucially, they have a more lenient rental stress test which meant that the client was able to borrow around 20% more than he would have been able to get from other lenders.
Here are the details of the deal:
Property Value: £300,000
Loan amount: £225,000
Loan to value: 75%
Rate: 4.09% 5 year fixed
Term: 10 years interest only
Monthly mortgage payments: £766.88
Monthly rental income: £1,000
Annual gross yield: 5.33%
Lender arrangement fee: 1.5%
Consultant: Jeni Browne
Tel: 01732 471647
Understanding Rent to Interest Calculation
The Rent to Interest calculation is the ratio of rent received to the interest cost of the related loan. This calculation is used by lenders to assess the ability of the borrower to be able to afford the proposed loan.
Currently, most lenders’ RTI is 125% @ 5% which can also be expressed as 192 x monthly rent. However, in this example, the lender’s RTI is 125% @ pay rate – 4.09% - or 235 x monthly rent. So in this instance most lenders would lenders would offer a maximum loan of £192,000 but the lender we approached as able to offer £235,000.