We were approached by a broker whose client, a self-employed property developer with experience as a letting agent, needed a limited company buy to let mortgage to purchase one of his personally owned properties.
The client had decided that incorporation was the best strategy for his portfolio in light of tax and regulatory changes.
The property in question is a three-bedroom bungalow, which was not in lettable condition when he purchased it. Having carried out the necessary refurbishment with the help of a bridging loan, the client had let the bungalow on an AST for £975 pcm.
On the face of it, this seemed a straightforward application. Unfortunately, the valuation report not only down-valued the bungalow by £35k from the client’s figure of £260k, it also put the achievable rent at £850 pcm despite it already being let for £125 pcm more!
To mitigate risk, the figures quoted in the valuation report were used to calculate affordability. The low estimate of market rent threatened to reduce the achievable loan to value, so the client opted for a five-year fixed rate product which could be stress tested at the pay rate (3.99%) to maximise borrowing.
Because the mortgage application was made by the client’s SPV limited company, we could apply an Income Cover Ratio of 125% rather than the 145% applied to personal applications. This allowed the client to achieve 75% LTV, although the maximum loan was still unavoidably reduced because of the down-valuing of the property.
This meant the client was unable to borrow sufficient to fully repay the bridging loan. Fortunately, he could remit the difference from his own funds and was happy to proceed.
The terms offered were as follows:
Property valuation report: £225,000
Client’s estimated property value: £260,000
Loan amount: £168,750
Rate: 3.99% fixed for 5 years, Classic Range
RTI: 125% @ 3.99%
Borrower: SPV Ltd Company
Term: 25 years’ interest only
Mortgage payment: £572 pcm
Lender arrangement fee: 2% added to the loan (£3,375)
Rental income: £975 pcm (actual), £850 pcm (valuation report)
Gross yield: 4.5% pa
Broker proc fee: 0.6% (£1,013)