Most second properties that are rented out as Buy to Lets will be valued on their bricks and mortar worth, but more importantly on the rental income achievable. In nearly all cases, the lenders will calculate the mortgage loan amounts based on the rental income achievable and confirmed by their valuer. This rental figure will need to be over and above the monthly mortgage payment. A normal calculation suggests that the rental must be 125% of the mortgage payment, based on an average interest rate of 5%. Any less and the lender will reduce the mortgage loan according to the reduced rental income. For example, if you wanted to borrow £100k, a reasonable test would be to multiply this by 5% (a fairly average calculation) and divide by 12 to get the monthly cost. This needs to be multiplied by 125% to determine the required monthly rental! In this example, £521 per month will need to be confirmed as reasonable by the valuer in order to achieve the full £100k loan from the lender. Please note that this is an example only and that varying lenders will have alternative calculations. Also, that in most cases the actual rate paid to the lender will be less than the rental stress test calculation mentioned above.
Long term fixed rates are currently very popular across the mortgage range as customers look to fix monthly budgets for the coming years. These rates are attractive across the residential sector, but there have not been many long term fixeds in the Buy to Let mortgage arena. So it is with open arms that a recent launch by Saffron Building Society, offering five year fixed rates on Buy to Lets, is welcomed to their already popular suite of products. This lender manually assesses cases, so no credit scoring, and they have the ability to think outside the box on more complex applications. Hopefully, other lenders will follow suit.
The moral of the story is to ensure that you do your homework before embarking on an investment property to let out. Always have a discussion with a local and reputable letting agent who can advise on the probable rental achievable from the outset, do the calculations and make sure the deal works before spending out on valuation / survey fees.