Buy to Let Mortgages - "Wash your face!"

There are a number of things that you need to be thinking about when you enter the world of BTL. Legislation, tax, finding a property, finding a tenant are but a few of the requirements that need to be on your To Do List. Top of that list for many though is how the hell are you going to finance the purchase?

Back in the day this was a relatively straightforward process with the lenders bending over backwards to throw money at your BTL empire. Stories are legend of any Tom Dick or Sally approaching their bank and being given fighting funds to just go out and buy property. Those that are new to the game where 75% LTV are mandatory think that you are pulling their legs when you talk about banks giving 100% loans to landlords. "As long as it washes it's face then have as much as you want" was the mantra of many a lender!

It is still the mantra of the banks but you are probably not only going to have to wash your face but also moisturise as well! No longer is it acceptable just to cover the mortgage payments in rent, you have to pass the stress test for the lenders. A device thought up by the lenders to take into account rental voids. It is based on receiving more rental income than you are paying out. It used to be the case that you had to have enough rent coming in to cover 125% of the mortgage at a notional rate of 5.5% ie £575 rent would get you £100K loan

£575 x 12 = £6,900

£6,900/1.25 = £5,520

£5,520/0.055 = £100,363

Nowadays the stress test is up at 140% @ 5.5% for most lenders! So to get a loan of £100K you need to have a rental of £665. That is a gamechanger.

£665 x 12 = £7,980

£7,900/1.40 = £5,700

£5,700/0.055 = £103,636

With rents not keeping pace with the increase in property values, added legislation and the loss of tax breaks BTL has reached a cross roads. Money can still be made but my view is that it will only now attract those that are serious about the venture. Your part time landlord will slowly but surely become a thing of the past.