R ecent research for the Pink 1,000 index shows 83 per cent of mortgage intermediaries think rental income calculated at low pay rates is the most important factor when looking for a buy-to-let product.Cynics may question how responsible this approach is to new lending but there are two key factors supporting lenders which gear their products to such a demand. First, most commentators now believe the buy-to-let market is sustainable even if there is a downturn in the housing market. The simple equation of a fall in house purchases equalling an increase in demand for rental properties seems to hold some credence. Second, buy-to-let investors have gone through a cultural transition and investment properties are now viewed as long-term investments as opposed to short-term income generators fuelled by increasing house prices. Both these factors start to align the buy-to-let market with the commercial sector rather than the residential. Lenders have not missed this opportunity and can be praised for understanding the needs and demands of buy-to-let borrowers. They have responded in three ways to concerns over falling rental yields, which now appear to be recovering. The most obvious way is by allowing the use of a low initial pay rate in the rental income calculation. Classic examples of this approach are Mortgage Trust, which offers a fixed rate of 4.79 per cent, and Capital Home Loans, which has a fixed rate of 4.75 per cent. However, while the products are worth considering for a number of reasons, one should not ignore the early repayment charges. With CHL, there is a 1 per cent fee which is offputting in particular for higher-value loans. Both lenders allow the low pay rate to be used in the rental calculation but the income would still need to cover 125 per cent of the mortgage payments. An alternative approach is to reduce the percentage of rental income required to cover payments. An exam- ple of this is Mortgages plc, which has reduced the percentage required to 100 per cent, despite the rental income being calculated using the reversionary standard variable rate. This is going down well with brokers when considered alongside the criteria and rate. Finally, lenders such as UCB Homeloans have applied flexibility to their buy-to-let products by allowing the applicant to use their self-certified income as well as the rental income to cover the mortgage. UCB will multiply the rental income by 6.5, add this to the self-certified income and then apply the income multiples. This avoids the changing exposure of rental yields altogether. While rental calculations were revealed to be the most important factor in the research, 7 per cent of brokers prefer products with no tie-ins. Certainly, I have found that brokers tend to select slightly higher fixed rates with no early repayment charges than lower fixed rates with lock-ins. An example is the demand for Mortgage Trust’s 5.39 per cent fix against the 4.79 per cent fix with an overhang. Another 7 per cent of brokers say the ability for clients to raise extra capital is the most important factor when selecting a product. Investing in a buy-to-let property has become a longer-term proposition and many clients are turning into semi-professional landlords as opposed to amateurs. This means they are looking to raise capital against the equity increases on existing investments to act as deposits to build their buy-to-let portfolios. This could become more important as remortgaging becomes a growing trend in the buy-to-let market as landlords seek better deals. Interestingly, only 2 per cent think portability is the most important issue. BM Solutions recently confirmed that all its buy-to-let products are portable and challenged the market to do the same. This is a commendable step, especially to encourage clients to take a longer-term view but brokers tend to favour products without lock-ins to enable clients to take advantage of good remortgage deals. A combination of these factors appears to make portability less of an issue in the buy-to-let market. Only 1 per cent of intermediaries feel that flexibility, such as payment holidays, is the most important factor. Is this because, as landlords become more professional, they have sufficient contingency cover so they do not need flexible options? If this is the case, it can be argued that lenders which are able to meet the needs of the professional buy-to-let investor by offering rental calculations using a low payment rate, reduced yield calculations or taking account of earned income in addition to rental income are just being sensible and not too accommodating.
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