How to increase your BTL borrowing capacity

One of the biggest hurdles faced by Buy to Let investors is achieving the level of borrowing they need to buy the property they want.

This has become a bigger hurdle in recent months thanks to the PRA Supervisory Statement (SS13/16) which came into force at the beginning of this year and imposed mandatory minimum stress tests on Buy to Let mortgages. This has impacted very significantly the product choices for landlords who want to increase their leverage, or invest in a property that delivers lower yields.

It is almost ironic that those areas where sustained purchase demand for property is strongest, can also deliver some of the lowest yields, because yield and capital growth prospects tend to be inversely correlated.

There are still some options for landlords seeking to invest in low yielding properties, including the option to top-up rental income with personal income and the growing popularity of five-year fixed rates products which can help to reduce the effect of the stress tests.

However on low yielding properties you can get first and second charge Buy to Let mortgages, available for between 12 months and five years, and it gives investors the option to roll up some or all of the interest. Any interest which is capitalised is not subject to a stress test and this increases a landlord’s borrowing capacity, particularly on lower yielding assets.

We recently completed a mortgage for an experienced investor who wanted to purchase a desirable maisonette in Fulham valued at £400,000. The investor wanted to borrow £295,000 to buy the property, but the rental value was only £1,495 per month and so the numbers did not stack up.

The lender was able to structure a solution by splitting the balance and enabling the investor to roll up interest on part of the loan and service the interest on the remainder. As there were no monthly payments due on element of the loan with rolled up interest, this portion was not subject to a stress test and so it meant that the serviced loan element, as it was now a smaller balance, met the required stress test.

Therefore, the client was able to invest in a sought-after property with robust potential for capital gains even though it delivered a low rental yield.

If you do need any assistance with a buy to let mortgage on a low yielding property, please complete the contact form below and we will be happy to help.

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