How Do Mortgage Lenders Calculate Affordability? - Nova

How Do Mortgage Lenders Calculate Affordability?

 

Nova Financial Ltd featured in Property Question Time on the Property Sky Channel 198

Our Managing Director Paul Mahoney on the Expert Panel:

Bryony Bilsen: Hello and welcome to Property Question Time with me, Bryony Bilsen. This is the show where you get the chance to have your questions answered by our resident property experts. So let’s see who we have in the hot seat today. First of all a warm welcome to Paul Mahoney, the founder of Nova Financial Limited.

I’m going to start things off by going to one of our first experts, Paul Mahoney. So Paul, are buy-to-let mortgages based on a fixed percentage of the value of the property that would be let out, or on the affordability of the applicant to make the repayments?

Paul Mahoney: Well the answer is both. Lenders have two main criteria, the loan to value being the amount of the loan versus the value of the property, and serviceability, which when it comes to buy-to-let mortgages is generally based upon the rent generated from the property in servicing the mortgage repayments or the interest on the mortgage. They’ll generally lend you the lower of the two amounts. The average maximum, if you like for buy-to-let mortgages is 75%. Some lenders will lend more, some will lend less. However, for as an example, if you had £100,000 property most lenders will lend you 75% of that, being £75,000

The other requirement is that you are able to service that loan. The Bank of England recently introduced a bench mark rate for buy-to-let lenders, which was 5.5%. That needs to be covered 125% of the time to account for any vacancy periods. So there’s a calculation beyond there, which I won’t go into right now, but that essentially determines how much you can borrow on that side of things. They will lend you the lesser of those two amounts. If you fill both then you can then borrow the maximum, if you don’t, then it’s the lower amount.

T: 0203 8000 600 W: Nova.Financial E: info@nova.financial

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