Variable rates and higher slicing could help save BTL deals – Berry


The past few weeks have been volatile for the industry as lenders reacted to the mini budget. But now that businesses have had time to adjust to the news, lenders are now returning to the buy-to-let market with their revised fixed rate offers.

Interest rates have risen, and are expected to continue, which in turn puts further pressure on lenders’ rental stress tests.

Ultimately, this will require homeowners to provide larger cash investments, which they purchase or pay off through a fixed rate mortgage.

However, there are other options available to secure a buy-to-let transaction for your clients – through variable rate products.

Variable rates will obviously change with market conditions and the monthly mortgage payment will fluctuate accordingly. However, variable rates offer more favorable rental stress tests and product benefits.

So the considerations for brokers are – what is best for my client? A potentially unaffordable fixed rate deal, which may not exceed the limit – but with the guarantee of the monthly mortgage payment? Or a variable rate deal that can secure ownership now – but comes with the uncertainty of future monthly mortgage payments.

Obviously, the variable rate can be transferred to a fixed rate agreement when future market conditions make it favorable.

How could this work?

Let’s explain how it could work with an example.

Mr Smith has a policy decision to buy a rental property to add to his portfolio, but given market conditions he is waiting and wants a fixed rate option.

Purchase price of the property: £335,000
Loan required: £250,000
Rental: £1,400 per calendar month

If Mr Smith agreed to a five-year fixed rate deal at 6.37%, where the stress test was 125%, the maximum loan available would be £210,989. This means Mr Smith would have to invest an additional £39,011 in the deal to meet the lender’s qualification criteria.

If Mr Smith instead took a two-year variable discount rate of 4.19% (no prepayment charge), where the stress test was 125%, the maximum loan available would be £244,363. This means Mr Smith would have to pay an additional £5,637 to back the deal, a significantly lower sum.

Alternatively, Mr Smith could take a variable rate of 5.99% – through a prime buy-to-let.

This is where the lender uses Mr Smith’s additional sources of income to support the claim to make up for any shortfall.

With a stress test of 125%, the loan amount of £250,000 could be met, meaning Mr Smith would not have to provide any additional money to complete the deal.

With rates rising to create a tougher and smoother market, finding a specialist financial partner and exploring different options to finance deals will strengthen your hand and help you close the deal.

Jason Berry, Group Sales Director at Crystal Specialist Finance

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