Tips on what should be considered before offering on an investment property.
Location, Location, Location
We’ve all heard it a million times before. And, whilst ‘location’ is no doubt very important to any property being considered for investment purposes, there is, or at least there should be, a lot more to it than that. So, here is the…Detail, Detail, Detail that should also be considered.
Price – It may sound obvious, but in the current market a price tag of ‘offers over’, say, £280,000 may well mean a home report valuation of £300,000 and a competitive bid at closing date being in the region of £330,000 - £340,000, or around 20% above the ‘offers over’ amount. High demand and low supply of good traditional housing stock in the popular areas of Edinburgh are commanding a 10% premium above the market valuation.
Loan-To-Value - Or ‘LTV’ as it is known. The key element here is that any mortgage will be calculated at the home report valuation, not the purchase price. So, in the example above, a ‘70% LTV’ mortgage will provide £210,000 of the funds. The other £120,000 - £130,000 of the purchase price will be required from you in cash.
Stress Testing –This is how lenders check the affordability of the loan based on a strict set of criteria. Whilst they may advertise to lend at, for example, a 1.99% interest rate, they will ‘stress test’ the loan at 5.5% and then apply a ‘rent cover ratio’ on top of that of 145%. In other words, most lenders are testing loans at 7.98%. If the rent is higher than the stress test, then the loan is likely to be granted. If it is lower, then it probably won’t be granted. In the example above, the rent would need to be at least £1,396.50 per month to pass the test.
PRA rules – From 30th September 2017 the Prudential Regulation Authority (PRA) will demand that lenders have stricter guidelines for checking affordability of ‘Portfolio Landlords’, defined as any “borrowers with four or more distinct mortgaged buy-to-let properties, either together or separately, in aggregate”. These guidelines may include landlord experience, total assets versus total borrowings, cashflows, tax return history, and the merits of the new borrowing in the wider portfolio business plan. In short, borrowing applications will come under much more scrutiny from October.