13th May 2017
I have a friend who keeps talking about how he should have bought more property when credit was plentiful i.e. pre 2009. Should Have, Would Have and Could Have, are terms which should not be used when it comes to property. There is no point looking in the rear view mirror, that environment is history and probably isn’t coming back.
The market has moved on, and to buy a property in the conventional way, i.e. having the title transferred to your name, you need a bigger deposit, one which will need to be even larger for portfolio landlords by 30th September of this year; when the restrictions will be extended from individual BTL landlords to portfolio landlords. The new stress test which came into existence on the 1st January 2017 is based on a 5.5% interest rate and a 125% rental cover.
Under this test, rental income of £1,000 per month will allow you to borrow £174,545 from the lender. In outer London, this criteria still allows you to borrow typically 75% of the property value, however, as you venture into the centre of London, the amount you can borrow slowly begins to drop to a point where it no longer makes any sense. The rental income overtakes the value of the property and governs the amount you can borrow. We have a property worth £1.8m in Bryanston Square, W1, and the rental is only £800pw, this equates to a yield of 2.3%. This would allow us to borrow £605k, which equates to only one third of the property value. In order to buy this property now as a Buy to Let investment, you would need to have a £1.2m deposit plus costs.
As values have increased in recent years, rents have not kept pace, the new regulations which have come in have compounded the issue of borrowing even further.
So, there are two sides to the equation, one is the borrowing and the other is the rents. There isn’t much you can do on the borrowing side, as this is the criteria set by the regulating body. However, there is something which can be done on the rental side, especially in the case of larger properties. Implementing an HMO licence can increase your rental income and, therefore, increase the amount you can borrow. And indeed turn your BTL investment into a cash cow rather than one which just covers costs, and can finally start to give you an income. There is wide spread ignorance on matters surrounding HMO licensing and implementation. We are currently implementing a very clever scheme in a building in St John’s Wood, and will apply it shortly after to a building in W1, and then Notting Hill. This will turn the investment from a plain vanilla average market deal to one which becomes a solid deal, bringing in cash flow on a month on month basis, and yet there is no compromise in location.