Slicing from the top
18th February 2020
We are in the midst of trying to place some mortgage cases for a client. Initially my assumption was these cases will be easy to place. Afterall, the client only wanted 50% of the value of each property. He has three large lumps at around £2.5M each to remortgage. I wrongly assumed this would not be an issue, especially as they would all be on a BTL basis.
BTL mortgage cases depend primarily not on the income of the applicant, but the rental income of the property. Here’s where the issue lies.
All the properties are in personal names. The rental cover has increased. It used to be circa 1.25, but since the tax changes have come in it has jumped to 1.45.
This has had a major impact on properties in central locations, where the rental yields tend to be very low but the potential for capital gains is high. The potential for future uplift is what central London property is all about. And currently, we’re in an environment where the brakes have come off, things are starting to move fast already.
To further illustrate this point, I was just looking at a property we mortgaged for a client some time back, in W2, valued then at around £300K. We have been asked to remortgage the very same property with an expected valuation of £960K. To put things into perspective, the property wasn’t a cash purchase, it was purchased with a good old 15% deposit, therefore, only £45K. You can see the uplift the property has given.
When things don’t go to plan, often the issue is not the property itself.
What often kills the deal is funding; for example, if you have a one trick pony and the property has been stuck in planning for years.
We have been in both of these scenarios.
However, this should take nothing away from the proposition of buying in one of the world’s most coveted locations. When you’re purchasing at the bottom end of the scale in a strong location, and the timing is right, your growth will be very strong. Property is driven primarily by location.
Many mortgage lenders have arrived at the same conclusion. Lenders have released finance even when the rental cover has not stacked up; this is because they still have a strong appetite to lend in strong locations. In their eagerness to lend, they have come up with a solution called top slicing.
This is where the stress test is not applied too rigidly to the BTL property. There are only two components which can be applied, one is the rental cover and the other is the interest rate it is applied to. Typically for properties in a personal name the ICR is 145%. In companies, this drops to 125%.
What the name indicates to me is one borrows more than required, therefore allowing the borrower to take off a slice from the amount borrowed in order to top up the interest payments.
In practise this translates to a dampening of the two variables i.e. the rental cover or the rate it is applied too.
There is a third way, which is to look at the surplus income of the client and take this into account alongside the annual rental income.
These are aspects of mortgages we are fast coming to terms with in regards to remortgaging central London properties.
The product of choice for our client in question is unsurprisingly a 5 year fixed rate, which is floating at around less than the 2% mark.