Buy to Let Calculation Changes

The Buy to Let market is changing rapidly at the moment and this is being driven by Government (for this read George Osborne) interference in the market, and some of these changes have forced lenders to revise their offerings. As a result of the withdraw of some taxation reliefs they have taken the view they need to lower the amount they will lend for a given rental income. Let me explain.

Buy to Let affordability is assessed in a very different way to a residential, and the key is how much rent can be obtained from a property. A lender will give a bigger mortgage if the rent is £1000pcm than if it was £800pcm, which is only logical. Lenders have never had a common calculation on this, which is why a case can fit with one but not another. There are 2 figures which are used, the “calculation rate” and the “multiplication” rate. To arrive at the figure that can be obtained the rental income received must exceed the mortgage payment by this calculation (based on interest only). The following is an example on a simple purchase case.

Mortgage required £100,000

Expected rental income £550pm

If a lender uses a “calculation rate” of 5% and a “multiplication” rate of 125%, this means the rental must exceed £520.83pm for the mortgage to pass affordability, which it would in this case. This is how you can calculate it:

£100000 x 5% = £5000 divide by 12 = £416.55 then multiply by 125% = £520.83

Mortgage brokers call this 125% @ 5%

If you increase the “calculation rate” to 5.5% then figure goes up to £572.91pm and it’s a fail. This is what has been happening in the past few months, with a few lenders even opting to increase the “multiplication” rate as well. The end result is smaller mortgages being granted and bigger deposits being required. I can see this change pushing up rents in the long term, which will be bad news for tenants but, hey, what Government has cared that much about its citizens.

I had a meeting with the area manager for TSB last week and he was pushing the fact that their “calculation rate” was 5%, which is low in the current market, but 2 days later it was raised to 5.5%. It is more important than ever to use a broker who can guide you through the minefield of what is a rapidly changing sector of the market place.

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