The background property portfolio stress test is stopping borrowing more
There could be a variety of reasons why you’ve been turned down for a mortgage when you have a property portfolio as there are so many boxes you have to tick but there is nearly always a way to wriggle free to an alternative lender if you know where to look.
The buy-to-let market is awash with Buy-to-let Mortgage Lenders. As you would expect many compete on interest rate whereas others are more tolerant on criteria and portfolio assessments, and it’s about the latter that this article relates.
Why was your buy to let mortgage turned down?
Here are some of the potential reasons why your buy-to-let mortgage was turned down because of the make-up of your property portfolio and potential solutions:
- Maximum number of properties
You’d think the bigger the property portfolio the greater the resilient to issues however the majority of Buy-to-Let Lenders cap out at 3 mortgaged buy-to-lets when different regulatory rules kick in, and many more Lenders stop at 10 as this entering the realms of commercial lending. Some apply limits to their lending level and others to the property portfolio with all Lenders. A small cluster do not have no limits on the portfolio size.
- Counting personal names and limited companies separately
Following on from above; one way to get around the maximum number of properties could be to hold them in separate legal entities. For instance, one in your name, one it you spouse’s name and another in a limited company name as depending on the Buy-to-let Lender this might only be seen as owing one.
- Tax Rate based on self assessment profit rather than gross rent
Nearly all Buy-to-Let Lenders operate a different coverage factor of 140% or 145% to replicate the higher and addition tax brackets. The calculation is based on income received i.e. gross rent and not the property profit declared. This is crucial to property portfolio lending as if you earn over £50,000 per annum when adding gross rents and earned income together you are hit by a harsher 140% or 145% coverage factor.
However, I’m aware of one Buy-to-let Lender that takes “rental profit from your Tax Returns” which could be a fraction of “gross rental figure” so could keep you inside the 125% factor which would improve borrowing potential.
- Rental assessment on lower tax earner
The industry default position is for the Buy-to-Let Lenders to use the highest Tax Bracket of any Applicant. For example, Applicant 1 is pays Tax at 40% and Applicant 2 is a lower rate tax payer 20%, the majority of Buy-to-Let Lenders work off a rental coverage factor of 140%.
However, there are some Buy-to-let Lenders that will apply a blend of say 135% and I know a Buy-to-let Lender that will use the lowest tax bracket so 125% rental coverage would be applied.
- Earned income
Generally Buy-to-Let Lenders look at the relationship between the expected rent and the monthly mortgage payment. However, some Buy-to-Let Lenders will also look to factor in surplus disposable income from a day job separate from property e.g. you work in a bank as well as have a property portfolio. This extra earned income could make up the difference in low yielding properties within the portfolio.
- Calculation based on Interest only rather than repayment
If you have “repayment mortgages” on your buy-to-lets the mortgage payments will be closer to the rental income which makes the coverage harder to achieve. There are Buy-to-Let Lenders that will take a view and work their sums on “interest only” anyway as they know that realistically you could swap them to interest only but are in fact being more responsible by paying down you debt.
- Concentration in postcodes
In an ideal world you property portfolio would be spread across the UK rental hotspots but what invariably happens is you buy properties in an geographic area you are comfortable with and has historically performed well for you or is easy to visit.
There are Buy-to-let Lenders that see this as a risk. As if there was a turn of events in the area your property portfolio could be affected across the board. Examples of this are compulsory purchase orders, new state of the art student accommodation complexes etc.
- Ownership of block of flats
Continuing on the same theme some Buy-to-let Lenders restrict the number of flats they will lend on in a block, say 25% to 33% of the units. This could be with you individually or their exposure across all borrowers.
They might also want the Freeholder to be a separate legal entity with no links to you to ensure there is no overriding interest in preventing the costs of essential repairs.
Needless to say other Lenders will allow 100% of the block and freehold to be owned by you.
- Portfolio value
It is common for property portfolios to run into the millions, let’s face it it’s a couple of properties in Surrey these days but some Buy-to-let Lenders cap their maximum borrowing with a customer, and others apply a maximum with all Buy-to-let Lenders.
Conversely, there are Buy-to-lets with no such caps on lending and look at each portfolio on its individual merits.
- Unlet flats with a portfolio
The high street rate Buy-to-let Lenders can have an idealistic ideas about property portfolios. They expect every property with a portfolio to be let at one time with a comfortable yield. The reality is if you are a professional landlord you are constantly upgrading your stock with means downtime for refurbishments and energy efficiency adjustments. This rental void period is simply a consequence and can be managed out. The more pragmatic Buy-to-let Lenders will either look for the portfolio overall to yield 100% coverage or will be grown-up enough to accept a short period of non-let provided they are confident it will be re-marketed shortly.
Another scenario might be where family lives in one of your properties and you are not charging the market rate. Again as long as the other properties make up the shortfall then there are options.
- Modest property values
It’s common for Professional Landlords to focus on the volume of properties. The driver is almost certainly rental returns rather than capital appreciation or vanity. From a Buy-to-let Lenders perspective the equity buffer may be viewed as too tight and risky in a downturn. Ultimately Buy-to-let Lenders will typically look for a quick sale if they need to repossess and want to be sure they can get their money back. Most work on the basis of individual rather than cross-charges so they need to be certain each property they lend on stacks up. Ex-local property and studio flats, and flats above or adjacent to commercial premises are often of greatest concern and a lower loan-to-value or higher property value may be sort.
The Loan-to-value blend within a property portfolio can be important. Although individual properties could be 75% or 80%, the individual Buy-to-let Lender might be looking a blend across all properties to be no greater than say 65%.
- Hard to evidence your paperwork / provide an audit trail
The larger the portfolio the more difficult this may become. You could have tenants in there for years on lower rents or perhaps on loose tenancy agreements. You could have been collecting the rents in person in cash or perhaps have provided a partner’s bank account for payment. There could be properties with no tenants, let to family or even based abroad.
The default position for Buy-to-let Lenders is to ask for Self Assessment Tax Calculations, Annual Mortgage Statements, Tenancy agreements and Bank Statements to match the rental credits.
There are of course Buy-to-let Lenders that only require some of the above or take a random sample for some of properties within the portfolio.
Others want business plans and details of all you assets and liabilities.
Failure to provide these requirements may have cast doubt and led to your mortgage decline.
The Buy-to-let Lender might simply have down-valued your property which led to your buy-to-let mortgage being turned down.
A different Buy-to-let Lender’s Surveyor might take a more favourable view and there are a band of Buy-to-let Lenders that go up to 80% loan-to-value which might be helpful the rental stacks up.
- Mixture of finance in your property portfolio
Your buy-to-let mortgage may have been declined as the Buy-to-let Lender got “spooked” by the make-up and gearing of finance within the property portfolio. It’s common for Professional Landlords to use all types of finance such as residential mortgages; mixed use semi-commercial; bridging; commercial mortgages; further advances; second charges; director loans; credit cards and personal loans to meet cash-flow demands.
- Underlying structure of your property portfolio
Trying to unravel and comprehend the structure of a property portfolio can be beyond the Buy-to-let Lender’s underwriting capabilities or wants. Inter-linked Companies, British Virgin Island (BVI) / offshore, trusts and Limited Liability Partnerships are vehicles which can be excluded.
- Concerns over usage
The Buy-to-let Lender might look at your past and current usage of the properties. Letting agency websites and AirBnB being two classic sources of information. Lets to family; Vulnerable tenants and Holiday lets might sit outside their policies. A history of moving into properties bought using buy-to-let mortgages may also put them off.
- Past Mortgage conduct
This is perhaps the hardest box to square. If you credit report shows missed mortgage payments then it’s going to be an up-hill struggle as this is the focal underwriting point for property portfolio lending certainly if there has been more than 2 missed payments in the last couple of years.
- High income low tax return
Keeping taxes low with property expenses is common. I’ve seen extremely large portfolios cross my desk with the declared property profit in four to five figures.
Buy-to-let Lenders will receive this news in three ways; i) they won’t like and will decline the mortgage; ii) they might take a view if you can demonstrate it was a “one-off”; iii) others may accept this as a regular theme.
Where we can help
Here are some of individual areas we can help on if your property portfolio has been declined:
• Background properties ignored.
• Unlimited property portfolio sizes.
• New properties assessed at 125% rental coverage even if one applicant is in a higher tax rate tax payer.
• Assessments based on pay rate and interest only.
• 100% of multi-unit blocks.
• All tenancy types: including standard ASTs, 3 year tenancies, lets to family relations, local authority DSS tenants, corporate let’s students, vulnerable persons (not minors), AirBnB and holiday let’s.
• Most property structures including personal name, SPV limited companies, trading limited companies, small shareholders, partnerships, limited liability partnerships, trusts, inter-company arrangements, offshore / BVI. We do not offer property clubs.
• Non standard properties and those attached or near to commercial units.
• Up to 85% loan-to-value.
• Uk citizens, Ex Pat’s and foreign nationals.
• Mortgages from £25,001 to no limit.
• Transfer of properties into company structures.
• Most types of deposits: Gifts of deposit, gifts of equity, builder incentives, landlord incentives, director loans, shareholder contributions and inherited property.
• Lenders that do not want to see Tax Returns.
• Low rated EPCs.
• Capital raising to buy future unidentified properties.
• Refinance recently bought and refurbished property. Even before the ownership is recorded on the land registry.
The most important thing is the willingness to share the portfolio details and reasons for the original decline with your Mortgage Advisor at the outset otherwise disappointment down the line will be a real possibility again as there are so many variables to check.
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