Savage buy-to-let remortgage lottery
FOR some, the words buy-to-let ‘landlord' might drag us back to the feudal system from which it was derived, and give the meaning: ‘the bad man in top hat with lots of money'. For others, it's the person doing their best to stay alive in an ever-problematic, heavily taxed and low interest rate environment.
When interest rates plummeted, many investors turned to second properties to provide themselves with a secondary income as inflation wiped away their hard earned savings (taxed savings earned through taxed income, I might add).
Inflation at 3 per cent with a return on your investments of 1 per cent means you are earning minus 2 per cent. If you are taking 4 per cent of your capital as income to stay alive your capital is losing 6 per cent per year. Interest rates have been rock bottom for nearly 10 years.
So we decide to take a risk with capital through equities or property to maximise that return and now become – a landlord.
Last week we mentioned the headwind for buy-to-let landlords where mortgage rates will be increasing (due to the Bank of England rate changes), remortgage rates will be increasing due to new stringent lending criteria for buy to let landlords, and landlords will (after 2020) only be able to have 20 per cent of their mortgage payments available as a tax credit.
Consider also the potential risk of the term funding scheme. Under that, banks were allowed to borrow very cheap money from the scheme. They filled their boots at around £106 billion.
Now they have to pay it back. Banks will have to offer higher savings rates to attract money in, and if so, there is the threat of higher rates again to cover that – the perfect storm. When the forecast tells you it's coming by 2020, you don't want to be in your rubber dinghy, far from shore.
Ronan Marrion, our mortgage specialist, has these five tips for you:
1. Each bank stress tests your ability to repay your mortgages differently to decide if they will lend to you and how much. They base this on: the rent you will receive; a rental cover (how much your rent will cover a mortgage); and a stress tested interest rate (the rate at which they want to know you can still repay your mortgage). Taking a person with a rent of £1,000, with one lender, the rental cover is 180 per cent and a stress test at 5.5 per cent mortgage rate, meaning maximum borrowing of £121,212. The same borrower goes to another specialist lender where their rental cover is just 125 per cent and a stress test rate of 3.79 per cent, meaning you could borrow £253,298.
2. Every time you apply for a remortgage/mortgage there is a footprint left which lowers your credit rating and can flip a future application from an acceptance to a decline, based on a computer assessing you as ‘desperate to find credit'. So, use an independent mortgage broker to go straight to the lender of choice, who you already know will do it and don't leave a destruction trail behind. There are many lenders who only offer their mortgages via a mortgage broker as they have the case packaged correctly to ensure it fits.
3. If you have more than three buy-to-let mortgaged properties, some lenders will not lend to you at all as you are classed as a ‘portfolio landlord', but others will. Don't leave that rejection trail behind you.
4. Some banks still use the old stress test methods meaning you will be able to borrow more, whilst other specialist lenders look at each unique set of circumstances, opening up the possibility of a common sense conversation about your business proposal.
5. Fees for remortgages range wildly from 0 per cent to 3.5 per cent but whilst added to the loan is still nothing more than a rate hike and money for old rope for the lender. Whilst the costs and availability vary wildly, an experienced mortgage broker can cut through that and have you off to the right lender in no time.
:: Peter McGahan is the owner of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. Have a question on remortgages? Call Ronan Marrion on 01872222422, email firstname.lastname@example.org or visit us on www.wwfp.net.