There are some important decisions you need to make when deciding to buy a property to let, but we can guide you smoothly through everything. It's different for everyone, so here's a really simple guide to work out what's best for you:
Market, regulation and mortgages
Being a landlord can be a great way to increase your income, or to acquire a property as a longer term investment. And in order to make it as profitable as possible, it's vital to get clear advice from a professional mortgage adviser. That's where we can help. We know the latest UK legislation and regulation inside out and can advise you on the detail of your mortgage requirements and put you in touch with tax specialists who can guide you on the most tax efficient way of purchasing a rental property.
Being confident you can afford it
Lenders traditionally calculate how much you can borrow by looking at the property's value and the expected rental income.
It's standard practice to build in a buffer too. T his allows for hidden costs such as the property sometimes being empty, paying estate agency fees and spending on maintenance. It is calculated by using what's known as the interest coverage ratio (ICR). The ICR determines the amount the lender would like the rental income to be, to cover the mortgage and other costs.
Recent regulation changes mean these calculations have got stricter. Lenders will also 'stress‒test' the mortgage, to make sure that an increase in interest rates won't cause any problems and you will still make a profit. The minimum stress test rate is either 5.5%, or 2% above the actual mortgage rate ‒ whichever is higher.
Here's an example based on a £200,000 mortgage, using a typical ICR of 145% of mortgage interest and stress testing using an interest rate of 5.5%. The minimum rent required works out at £1,329 per month.
Taking personal income into account
This is known as income top‒slicing. Some lenders will factor in your personal income if the stress-tested monthly rental calculation explained above falls short. They will look at how much you earn compared to all you spend, including your residential mortgage, household expenditure and rental property costs.
If you have extra income after covering all your outgoings, these lenders will combine it with expected rent to calculate the maximum you can borrow.
