85% Buy to Let lending is back…, but at a cost!
The buy to let lending revival seems to be gathering pace and in a surprisingly bold move, one of the specialist non high street lenders has launched a buy to let product available for purchase & remortgage with only a 15% deposit requirement. There have been more new entrants that have launched at 80% loan to value and previously active Buy to let lenders have started to return to the fray with rumours that more key players are soon to follow.
Criteria Highlights of the 85% product:
- First time buyer landlords allowed
- New Build (including flats) available to 65% loan to value
- 5% builder deposit accepted
- Minimum age 25 – maximum age 75
- Applicant 1 Minimum income > £25,000 up to 80% loan to value
- Applicant 1 Minimum income > £30,000 above 80% loan to value
- Max loan amount £350k & max portfolio £1m or 3 properties whichever lower
- Minimum value £90k (£120k for new build flats)
- 120% rent cover based at pay rate
2 year fixed rate at 5.99% at 85% loan to value but reversionary rate is 5% over LIBOR and arrangement fee is 2.5% of loan amount.
Our thoughts: It is good to see a lender pushing the lending boundaries again and hopefully it will have the effect of bringing much needed competition back to the buy to let market should the bigger players respond to this move. However, you need to think extremely carefully before committing to this particular deal and it is not going to be right for every investor in view of the high reversionary rate.
This example highlights the potential sting in the tail:
£100k purchase & £85,000 loan amount with rental income achievable of £550 per calendar month.
Annual yield of 6.6% so it meets the lenders rental income calculation and initial monthly payment during the fixed rate would be £434.90 on an interest only basis. Cashflow positive of £115.10 per month.
If base rate were to rise by 2% during the 2 year fixed rate period and assuming LIBOR increased by the same differential as Bank of England base rate then the reversionary rate at the end of the fixed rate period would be 7.85%.
Reversionary monthly payment on an interest only basis would be £569.94 meaning that there would be a cashflow shortfall of £19.94 per month if rental income had failed to rise in line with base rate.