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Rental arithmetic

The increasing number of lenders entering the buy- to-let market is a welcome development. First Active is offering a competitive 5.19 per cent two-year fix and 5.29 per cent two-year discount rate. The long-term tracker rate they revert to – 1.1 per cent above base rate – is a retention feature we do not see enough of.

However, at second glance, the products are not as attractive as they first appear. The biggest problem that landlords will struggle with is rental yield.

The lender demands a monthly rental income of at least 130 per cent at 5.6 per cent. So, at 80 per cent loan to value, a yield of 5.8 per cent is required.

Compare this with The Mortgage Works, offering 125 per cent at 4.69 per cent, which at 80 per cent LTV requires a rental yield of 4.69 per cent.

Admittedly, TMW charges a higher fee at 1.5 per cent of the mortgage amount compared with First Active’s 399. But it can be worth paying a higher fee to get a better rate and more flexible lending criteria.

Ultimately, many landlords will not be able to borrow enough. Someone with a monthly rental income of 950 could borrow 156,593 from First Active compared with 194,456 from TMW.

The maximum LTV of 80 per cent might not be high enough for landlords in London and the South-east, with most lenders going up to 85 per cent and even 89 per cent in some cases.

For most landlords, there are better products out there.

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