If you’re looking to secure a loan on a holiday let, our Holiday Let / Airbnb Guide will be helpful
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A growing number of people are investing in buy-to-let properties, which gives them the opportunity to generate long-term, sustainable income.
One common method of raising funds for this type of property is through a secured loan, which allows borrowers to release equity from a buy-to-let property, often using the rental income to cover the monthly instalments.
Before you apply it’s a good idea to find out more about how buy-to-let secured loans work, what lenders tend to look for and the kind of help you can get along the way, which we get into in more detail below.
An assured shorthold tenancy agreement (AST) is needed when a property is privately let to tenants. The document is used to outline the rules of the short-term tenancy.
Some lenders will be open to reviewing applications without an AST, Up to 90% of the projected rental income may be considered by lenders, provided a clear plan is in place for servicing the loan until the property generates rental income. The projected rental income will also have to be validated by a surveyor during the valuation process.
Even if the property is not expected to produce rental income in the foreseeable future, it may still be eligible for a secured loan. For example, if 50% of your net income can cover all secured payments (including current mortgages and the new loan), the application can usually proceed.
Feel free to get in touch with our team who will be happy to explain how ASTs and rental income work and how they can affect your application.
A calculation called the ICR (Interest Coverage Ratio) is one of the tools used by lenders to assess a landlord’s ability to pay the mortgage on a buy-to-let property. It is applied to both HMO and single let properties and measures the applicant’s affordability over the duration of the repayment period.
Each lender has its own threshold in place, which is usually determined by your tax band. For example, there may be a lower threshold in place for people who pay a basic rate, whilst it may be raised for higher and additional-rate taxpayers.
If you are a landlord with a certain amount of experience, some lenders may apply a lower ICR, depending on the circumstances.
For limited companies that want to use a buy-to-let property as security against their loan, there is usually a 125% ICR threshold, unless stated otherwise.
The Willows team is available to explain how ICRs work and give you more insight about the threshold that will be applied to your property, as simple example.
Example Calculation:
1.Monthly Rent
£1000
2. For basic rate taxpayers: Divide by 125% to account for tax obligations:£1,000 ÷ 1.25
= £800
3.For higher-rate taxpayers: Divide by 145% to account for the higher tax liability: £1,000 ÷ 1.45
= £689.66
4. Subtract the current buy-to-let mortgage payment (e.g., £450): For Basic rate: £800 - £450
= £350
4.1 Subtract the current buy-to-let mortgage payment (e.g., £450): For Higher rate: 689.66 - £450
= 239.66
This calculation suggests that you could structure repayments based on the surplus, applying it either on an interest-only or capital repayment basis. For a basic rate taxpayer, we could offer a loan with a repayment of £350, while for a higher rate taxpayer, the repayment would be £239.66
This is referred to as ‘top slicing’ which occurs when a borrower’s personal income is included in addition to their rental income.
Some lenders may consider any extra personal earnings as part of their affordability assessment, taking into account your landlord experience and current income levels.
This can prove helpful in increasing your borrowing capacity, provided you meet all the lender’s criteria.
We work with several lenders that offer loans to individuals with regulated buy-to-let mortgages other wise know as a consumer buy to let (CBTL). These include those who have inherited a property or accidental landlords.
An accidental landlord, for example, may be a couple who each owned their own residential property before meeting. After deciding to move in together, they may choose to rent out one of their properties. In such cases, the property was not originally purchased as a buy-to-let but instead became one due to circumstances.
A regulated buy to let mortgage is a requirement for anyone who wishes to rent the property to an immediate family member.
Depending on the lender and your circumstances, existing property income can be included or in some cases project rental income may suffice.
It is usually fine to use a House of Multiple Occupation (HMO) as security against your loan, provided you meet the lender’s criteria.
Using an HMO can be a useful alternative for anyone who wants to access some of the property’s equity without having to refinance the current mortgage.
Most lenders will prefer the property to be a standard construction house or bungalow intended for HMO use, although there can be flexibility on this point.
Depending on the lender, minimum loan sizes and loan-to-value (LTV) ratios can vary, which is something we can discuss during the early stages of your application.
If you are thinking of using an HMO or have any specific questions about its eligibility for your loan our expert advisors are on hand to help whenever you need.
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This shouldn’t present any complications, provided that the status of the property has been changed with your local council, so it is now classified as a standalone residential property.
If you wish to re-categorise an HMO, it will need to be reconverted back into a residential property intended for single use. This can usually be done without planning permission, but it is important to consult your local council to ensure this is the case.
This usually depends on the type of agreement you have in place. If there is an AST between you and a company, instead of a private individual, there are some specialist lenders that would consider the property.
For example, if a client owns a property close by to a film studio and has an AST with a production company that uses the property to accommodate staff working at the studio for a certain period, lenders will likely view this as acceptable.
On the other hand, if a property is let to a charity, it may be more challenging (although not impossible) to have it accepted as most charities tend to be public or private foundations/trusts.
If you’re not sure which category your property falls into or you need more information about what properties are accepted for secured loans, we’re available to speak with at any time.
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Finding the right finance doesn’t have to be complicated – so, we’ve made the process clear and simple. Whether you’re applying for a Secured Loan, Mortgage or Bridging Finance, we’ll compare the market for the best options that meet your criteria and provide you with a fast no-obligation quote.
The initial enquiry takes under 2 minutes to request an in-principle loan or mortgage quote.
See if you meet the basic criteria for the loan and that you can afford the monthly repayments
We submit the application for the underwriter to review and issue the binding offer.
You sign and return the offer, and the lender releases the funds.
Everyone’s financial circumstances are unique, so it’s important that you are matched with the right lender who fully understands your needs. At Willows it’s our job to search the market and find the best deals to suit you, saving your valuable time and ensuring you have an expert on your side every step of the way.
If you want to start your buy-to-let secured loan journey today, get in touch with the Willows team on 01656 766 158 and we’ll answer any questions you have about the process.
If you’re looking to secure a loan on a holiday let, our Holiday Let / Airbnb Guide will be helpful
To find out more about secured business loans, or if you have any questions you need to ask, get in touch with the Willows team on 01656 766 158 and we’ll be more than happy to help.
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