Peter: So Alasdair, I mean limited companies are all good, that’s all good. One of the things which the bank will be looking at, whether you are buying in your own name or whether you are doing it through a limited company, as you’ve already alluded to is the rental of the property when you’re thinking about buy to let. And there’s the thing which I believe is called the stress test or at least that’s what it’s referred to as, which is presumably part of that process of looking at the rent.
Alasdair: Yes.
Peter: What is that and how does that work?
Alasdair: Well, different lenders use different stress measures, generally speaking, if you’re buying in your own name most lenders look at 5 ½ % stress test and they want to see 125% cover, that’s for basic rate tax payer, or 145% cover if you’re a higher rate tax payer. Limited companies benefit from the ones who five the 125% rent cover pretty much from every lender involved in limited company sector. The stress rate is lower if you take out for example a longer-term fixed rate 5 years or more. This is where there is a degree of complexity. Some lenders use a 4/ 4 ½ % no show rate, other lenders in the special sector will actually use the pay rate, so whatever the 5 year pay rate is, so it could be for example 3.49% if you buy through a limited company then that’ll be 125% x 3.49%. And that assessment is against the borrowed money. So it’s not against the value, it’s on the borrowing. So that’s the minimum level of rent cover required to service the loan using those stress rates, stress test rates.
Peter: Right, so it is complicated. And the fact they have a different rate for higher tax payers, I didn’t realise that. That’s really interesting.
Alasdair: It can make a huge difference Peter, particularly for properties which are relatively low yielding, some of these are higher rate tax payer and they’re looking for example 2 year fixed rate level of minimum rent required compared to, let’s say, if they were to do it through a limited company with a 5 year fixed rate, the difference can be quite significant. It can be the difference between the deal going through or not.
Peter: Yeah absolutely, well I can see that. And the fact that you know fixed rates come in to it, your tax bracket comes into it, again, this is more evidence really that you need help with this. Although presumably most people who come to you for a mortgage they don’t even know this applies, presumed this is all worked out by the broker and you make sure it works before.
Alasdair: We’ve got various calculations which we can use but the unknown to us, and you have to look into what the client’s best estimates are, are on the rental income because just because the client says the property is worth £1000 a month rental income that doesn’t necessarily mean the lenders valuer is going to assume that, and it’s always best based on what the lender’s valuer assumes or estimates the rental at.
Peter: Absolutely, because that’s one of those things where we think about down valuations as being how much is the property worth but I’ve had cases and I know of cases where the valuers been round and put the rental valuation on the property and notwithstanding there’s a tenant in place who’s got a signed AST, they’ve actually put a lower rental value on and you think ‘how can you do that? They’re paying £750 and you’ve said it’s £650’.
Alasdair: I’ve had some shockers over the years very similar to that. The good news is most lenders will actually consider an appeal, by and large, it should be successful if you’ve got a signed lease agreement and you’ve got evidence through a couple of months’ bank statements or a letting agent confirming in writing. Generally speaking, most lenders will uphold those appeals, not all but most will. If it’s a question of, look we’ve got rental coming in at X the valuers come in and valued it at less than that. More often than not we can challenge them successfully.
Peter: Well, good, good. That is common sense. It’s unusual to get common sense in that type of situation but that is good, I’m glad about that.
If you’d like me to put you in touch with my very good mortgage broker please email me:
peter@thepropertyteacher.co.uk
