Buy to lets have come into focus in the press a lot recently, is there anything special about them from a lending perspective?
Because a Buy to Let property provides a source of income, it’s a natural way to check that the buyer can afford to meet their monthly payments and pay back their loan. If the property does not provide enough rental income to support the amount the borrower needs then there is a problem. But in general, it can be seen as a great lending proposition which in turn creates a win / win situation for the client and lender alike.
That sounds very safe, are there any risks?
Of course, if the borrower does not actually have tenants in the property, then there is always the danger that they overestimate how much rental income the property can generate and personal income they will be able to earn. Although the rental market is very strong in the UK overall, it is important that we understand the borrower’s experience as a landlord and that they are aware of any associated risks such as void periods or health and safety.
What are some mistakes a new landlord might make?
Well a lot of it comes down to understanding legislations around tenants. If there is not a formal tenancy agreement in place this may cause problems if the property were to be repossessed. It may also be necessary for the landlord to check the UK residency rights of their tenant. A first time landlord may not have considered the recent cut in tax relief and stamp duty increase and may not be aware of the rental income cover of up to 145% of the monthly mortgage payment calculated by some lenders. Also, landlords must be registered appropriately, if they are not then there can be serious consequences for the property. There are various checks the council will want to carry out, such as fire safety, health and safety including a Housing Health and Safety Rating System, and ensuring the property meets HMO licence requirements, where appropriate.
What about an experienced landlord?
Probably the biggest issue a property can have is health and safety. If it is deemed that the landlord has not maintained the property adequately or if there is a specific issue like damp, then as a lender we would need to assess this carefully to consider whether the property is deemed suitable investment security and we may not want to be involved.
So overall, regulations are a big factor?
Yes, and with MCD, we now have to consider if they are an ‘Accidental Landlord.’ For instance, if they inherited the property and wish to rent out to provide an income, and in fact, if they have ever lived in it, then the loan will be regulated and must be written under MCD rules with FCA permission.
Do you have any advice for Buy to Let landlords considering bridging?
It’s all about the exit and it is imperative to ensure a solid AST agreement is in place and that the rental income is sufficient to cover any mortgage payment so that refinance can be arranged for a longer term loan or if exit is sale that realistically this can be achieved within the term.