The issue of affordability continues to dominate the conversation for many landlords. Those looking to remortgage or purchase a new rental property may face significantly higher costs and outgoings in the coming months, compared to their usual expenses over the past 15 years.
In fact, the Bank of England recently warned that the average monthly buy-to-let mortgage repayments will increase by around £275 by the end of 2025. Furthermore, lending to landlords has also become more stringent. With the Prudential Regulation Authority implementing changes that require landlords to meet stricter affordability assessments when applying for mortgages, this aligned with higher rates having an impact on affordability for lending requirements.
The guidance acknowledged that the “current industry standard is to set the minimum ICR threshold at 125%” and that a variety of factors – including rental demand, the borrower’s property-related costs, and any tax liability associated with the asset – “may lead to higher minimum ICR thresholds”. In some cases, this can rise to 145% or even 165%. The reality is that some applicants may struggle to meet ICR stress testing at 145% or 165%, particularly in the current climate.
Maximising investments
If this sounds like your client, here are some of the pros and cons of potential opportunities:
HMOs
Pros:
Purchasing an HMO or converting a single residence into an HMO is one route. Not only does an HMO generate a pooled income, but it can also ease some of the pressure from a market that is suffering an acute lack of supply. Plus, by having multiple tenants within a single property, if one unit is either unoccupied or behind on their rent payments, there will not be such a detrimental effect on your income flow as if it were a single unit.
Demand for short-term leasing of dwellings and flexible accommodation is also on the increase. Short-term lets for professionals who regularly travel, along with student lets, continue to raise demand for available rooms, with rental prices increasing in line with demand.
Other benefits include tax advantages and increased property value through improvements such as loft conversions.
Cons:
Owning an HMO means following strict regulations and licensing, which can be overwhelming and costly – a property manager can help ensure compliance, however. Converting space into bedrooms and alterations needed to make shared facilities more accommodating can be expensive too, and as HMOs are normally furnished, the purchase of household items needs to be factored in. Reselling an HMO may also be challenging due to limited interest, and financing via traditional lenders can be tricky due to strict requirements.
How MT Finance can help
BTL mortgages:
- Up to 80% LTV
- ICR from 125%
- Minimum value £100,000 (outside of London)
- England & Wales only
- Individuals and limited companies
- Adverse credit considered
- 10 beds maximum
- 12 months experience as a landlord
Bridging finance:
- Up to 65% LTV
- Minimum value £150,000
- 1st and 2nd charge
- England & Wales only
- Individuals and limited companies
- Adverse credit considered
- No maximum beds
- No previous experience needed
- Terms from 1 – 24 months
- No up-front fees, exit fees or ERCs
Commercial property
Pros:
The allure of commercial property lies in its potential for higher yields, longer lease terms, and a diversification of tenant types. To properly invest in commercial properties, it’s important your client has a long-term investment strategy, conducts a thorough market analysis, and has a full understanding of the associated risks.
There is an array of opportunities in the commercial property sector, from office spaces and retail units to industrial complexes and warehouses. The attraction of reliable, long-term income accompanied by possibilities for capital appreciation is drawing landlords to this promising sector.
Investing in commercial property also gives more control over expenses like maintenance, repairs, and improvements. Investors can negotiate contracts, hire a management company, or make energy-efficient upgrades to save on utility costs.
Cons:
Commercial properties can have greater related costs than residential properties, including higher purchase prices and operating costs such as maintenance, taxes, and insurance. This may require a larger amount of upfront capital.
Investing in commercial properties comes with higher liability risks compared to residential properties. These risks include potential legal fees and insurance payouts if someone gets injured on the premises. Additionally, commercial properties require more advanced management skills, such as leasing, marketing, and maintenance. Seeking help from experienced management companies may be necessary to handle these complexities.
How MT Finance can help
Bridging finance:
- Up to 60% LTV on vacant possession value
- Minimum property value £150,000
- 1st and 2nd charge
- England & Wales only
- Individuals and limited companies
- Adverse credit considered
- We allow for change of use
- If planning is required it needs to be in place before bridging loan is granted
- Terms from 1 – 24 months
- No up-front fees, exit fees or ERCs
Holiday lets
Pros:
With demand for “staycations” skyrocketing, the tax advantages, and a potential for higher profits holiday lets are an appealing prospect for many property investors.
Standing apart from traditional buy-to-let properties, holiday lets offer more attractive tax allowances, including capital allowance if the property is a furnished holiday let. This can mean greater profits and more money in your client’s pocket. With the rise of platforms like Airbnb, finding and managing holiday rentals has never been easier. What’s more, properties in popular holiday destinations often experience appreciation over time, potentially increasing the value of your client’s investment.
Cons:
Despite the earning potential mentioned earlier, due to seasonal demand, your client’s income may vary due to off-peak seasons even in popular holiday locations. There are extra costs to consider that could impact on returns. Along with cleaning fees and utilities, there are property management costs to consider. Plus, the holiday rental market can be influenced by economic conditions, affecting travel and tourism, which in turn impacts their demand.
Certain areas may require planning permission for rentals over 90 days and some local authorities have banned the sale of new non-primary residences for use as holiday lets. Some lenders have also stopped offering short-term let mortgages, making it more complicated to finance traditionally.
How MT Finance can help
BTL mortgages:
- Offered on the Standard Product Range
- Airbnb, holiday lets, and short-term lets accepted
- Up to 80% LTV
- Stressed on what a standard AST would achieve at 125%
- No holiday / short-term let restrictions
Bridging loan:
- Offered on the Standard Product Range
- Airbnb, holiday lets, and short-term lets accepted
- Up to 70% LTV
- Holiday / short term let restrictions considered
- Terms from 1 – 24 months
- No up-front fees, exit fees or ERCs
Semi-Commercial Property
Pros:
Semi-commercial property offers a unique investment prospect for landlords seeking diversification. The potential for dual income streams from both the residential and commercial components offers a compelling investment proposition, often with the added benefit of flexibility in asset utilisation.
Cons:
Similar to commercial property, semi-commercial properties have greater costs than residential properties, including higher purchase prices and operating costs such as maintenance, taxes, and insurance. Lenders often have specific criteria for mixed-use properties as they are considered riskier investments due to the mixed-use nature and potentially more complex cash flows, therefore, securing finance may be trickier.
How MT Finance can help
BTL mortgages:
- Rental income and property value based on residential element only
- valuation fee based only on the residential value
- Up to 80% LTV
- ICR from 125%
- Minimum value £100,000 (outside of London)
- England & Wales only
- >40% commercial element
- Individuals and limited companies
- Adverse credit considered
- Loan based on residential rents & value
- 12 months letting experience
- More than 4 units in a block loan capped at £700k
Bridging Loan:
- Minimum property value £150,000
- Up to 65% LTV
- 1st and 2nd charge
- England & Wales only
- Individuals and limited companies
- Adverse credit considered
- Terms from 1 – 24 months
- No up-front fees, exit fees or ERCs
Specialist BTL stepping in
As high street banks’ criteria remain strict, responsibility often falls to specialist lenders to assist where they can. To do this, they need to think outside the box to find solutions. Cases are rarely black and white and, subsequently, grey is more likely to be considered. Other benefits of placing a case with a specialist buy-to-let lender include what is often a more varied product range – including securing against semi-commercial properties and holiday lets giving increased flexibility.
For landlords and investors looking to purchase a new asset, the rise in costs could have a significant impact on what they could borrow. Fortunately, specialist lenders tend to have less rigid criteria when it comes to affordability. This includes slightly lower products but with higher fees. While the cost for the client is the same from a payment perspective, the ICR on a cheaper rate allows them a greater capital release upfront.
What landlords need now is flexibility – it’s never been a more crucial time for brokers to identify the specialist lenders best placed to support their clients.
At MT Finance, we understand the pressures that landlords are under and are determined to provide them with the best possible solution. Our ICR stress testing is set at 125% on five-year products across all tax brackets and we offer up to 80% LTV for standard residential properties, including holiday lets. Meanwhile, our bridging loans have also been designed to provide funds to those who need to move quickly. Each application is manually underwritten, allowing us to take a common-sense approach. If you would like to find out more about our buy-to-let products or our bridging loans, visit our site.