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How to maximise borrowing on a buy to let mortgage

Think you know the maximum amount you can borrow when mortgaging or refinancing your buy to let? Think again. Expert mortgage adviser, Andy McOwat, shares his tips for eeking out a little bit more.

Working out how much you can borrow is not as straightforward as it used to be due to regulatory guidelines which were introduced in 2017 by the Prudential Regulation Authority. Because of this, my clients are often pleasantly surprised when I tell them they can borrow more than they were expecting.

Why? Well, it’s all about the calculations lenders can apply when working out how much you can afford and stress testing the loan. Let me explain…

Borrow via a Limited Company

Lenders can use a more generous Income Cover Ratio when underwriting applications from limited companies. Typically, they expect the rental income to cover c.125% of the monthly interest payment, compared to c.145% (sometimes more) on a personal application. For mortgage rates of less than five years, they then stress the ICR at a minimum of 5.5% (this is the notional rate suggested by the PRA).

Example:
Property price/value: £150,000, Rent: £650 pcm, / £7,800 pa, Borrowing up to 80% LTV (i.e. max loan £120,000), Mortgage: 2 year fixed rate

Personal borrowing:
Typically lenders apply a Rent to Interest calculation of
145% at 5.5%, i.e. (£7,800 / 145%) /5.5% = £97,806

Ltd Co borrowing:

Typically lenders apply a Rent to Interest calculation of
120% at 5.5%,
i.e. (£7,800 / 120%) / 5.5% = £118,182

Borrowing via a Ltd company ups the available loan amount by £20,376

As always, do take professional advice before going down the limited company route because it’s not right for everyone.

Still want to borrow personally?

If it’s right for you to borrow personally, you could consider taking a 5-year fixed rate buy to let mortgage because lenders can apply a more generous stress test to rates of 5+ years duration. So, instead of applying the notional rate of 5.5%, they might apply the product interest rate.

Example:
Property price/value: £150,000, Rent: £650 pcm, / £7,800 pa, Borrowing up to 80% LTV (i.e. max loan £120,000),

Personal borrowing on a 2-year fixed rate:
Typically lenders apply a Rent to Interest calculation of
145% at 5.5%, i.e. (£7,800 / 145%) /5.5% = £97,806
Which is short of the max 80% LTV by £22,194. To achieve this level of borrowing you’ll need to choose a 5-year fixed rate…

Personal borrowing on a 5-year fixed rate of say 4%:
Typically lenders apply a Rent to Interest calculation of
145% at 4%, i.e. (£7,800 / 145%) /4% = £134,483
Which means you can borrow up to the max 80% LTV of £120,000

Combining Ltd Company borrowing with a 5-year fixed rate

And of course, you can combine the two approaches…

Example:
Property price/value: £150,000, Rent: £650 pcm, / £7,800 pa, Borrowing up to 80% LTV (i.e. max loan £120,000), Mortgage: 5 year fixed rate (say 4%)

Ltd company borrowing on a 5-year fixed rate of say 4%:
Typically lenders apply a Rent to Interest calculation of
120% at 4%, i.e. (£7,800 / 120%) /4% = £162,500
Which means you can borrow up to the max 80% LTV of £120,000

Of course, it’s not guaranteed, borrowing is always subject to a combination of factors including the product’s maximum loan to value, full underwriting process, the rental income, the property’s value but as you can see, borrowing via a limited company and over a 5-year fixed rate can make a significant different.


If you would like to explore how much you could borrow, do get in touch and I’ll happily do the maths for you! I can be contacted directly on 01625 416396 or email me: andym@mortgagesforbusiness.co.uk

 

You may also like:

First-time landlords buying via a Ltd Co

Struggling to secure finance post PRA? We have a solution…

Setting up an SPV Limited Company

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NB: ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

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