Why Wimbledon Landlords need to know how a buy-to-let mortgage works
Wimbledon is not just known for the annual tennis tournament that sees thousands of visitors descend on SW19 each year. It is one of the most sought-after addresses in the capital, and helps explain why large family homes in and around Wimbledon Village can command rents of more than £10,000 per month.
Despite a 3% stamp duty surcharge on second homes being introduced in April, the opportunity to own an investment property in or near Wimbledon Village remains open to landlords – if they get to grips with how buy-to-let mortgages work.
The widespread reduction in mortgage rates, sparked by reports that the Bank of England is set to cut its base rate to an all-time low of 0.25%, has given the buy-to-let market in Wimbledon Village, Coombe and Kingston Hill a shot in the arm.
However, UK-based investors looking for a BTL property within easy reach of Wimbledon Common and Richmond Park need to take into account five key lending criteria before applying to take out a landlord mortgage.
Loan to value ratio
A lender’s LTV determines how much an investor can borrow in relation to a property’s worth. While BTL lenders offer maximum LTV ratios of 75% or higher, the best rates are reserved for investors taking out a loan with an LTV ratio of 65% or lower. This means that if an investor wanted to purchase a spacious ground floor apartment with a private patio situated in a prime position in Wimbledon Village for £845,000, a lender would only offer their most competitive rates on a £549,250 BTL mortgage.
A further consideration when it comes to LTV ratio is the size of the home loan. Many BTL mortgage providers reduce the LTV ratio to 50% if the mortgage value is £1.5m or over.
Interest cover ratio requirements
To make sure an investor can afford to keep up the repayments on a buy-to-let mortgage, lenders look at the relationship between the rental income a property generates and the cost of the loan.
This follows Chancellor George Osborne unveiling a tax change in 2015 that will remove landlords’ ability to deduct the cost of their mortgage interest from their rental income when they calculate a profit on which to pay tax.
In effect, this means landlords will be taxed on their turnover rather than their profit and has led mortgage providers to increase their BTL interest coverage ratio from 125% to 140%.
If the interest charged on an £845,250 landlord mortgage is £1087 per calendar month, the property in Coopers Lodge would need to generate a rental income of at least £480 each week to meet the 140% interest coverage ratio requirement.
Non property related income
In addition to the income a property investment can generate, many BTL mortgage lenders require investors to be able to prove they have a minimum pre-tax income of at least £30,000 per year for a single applicant or £50,000 per year for joint applicants. This condition, in addition to other affordability criteria, is most commonly applied to first-time landlords.
For would-be landlords whose income comes from self-employment, lenders will usually require a minimum trading period of at least 12 months.
Primary property ownership status
A growing number of BTL mortgage providers require first-time property investors to be homeowners, and to have paid their mortgage without any problems for at least 12 months.
With a growing number of investors aged 55 or over using their net income from BTL property to fund their retirement, landlord mortgage providers are increasing the upper age limit for borrowers at the end of the loan period to a maximum of 85 years, while loan terms are also rising to up to 40 years.
Every BTL mortgage provider attaches different terms and conditions to their property loans and the information above is intended to act only as a guide to the factors to consider when seeking finance to fund an investment property purchase.
Robert Holmes & Co takes no responsibility for any of the above information not applying to each individual lender and urges all property investors to consult a suitably qualified financial adviser before committing to a property purchase.
However, as Wimbledon Village property specialists, we can advise BTL investors on which homes in and near Wimbledon, Coombe and Kingston Hill will meet your investment requirements. For more information on BTL properties in Wimbledon, contact Robert Holmes & Co today.