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I have just applied for a product switch and a further advance with my current lender, however the amount I wanted to borrow exceeded the amount I was actually allowed.
To give you an idea:
Current property value: £380,000Current mortgage: £134,000Current rent: £1250
Based on above, current equity is £246,000 (64.7%).
I was hoping to release around £100k, whilst still having at least 25% equity in the property. I thought I would clear this, however after speaking to the mortgage company, they have confirmed I can borrow only £79k! They said this is based on current rental value. This is also based on going for a 5 year fix, if I went for a smaller term, I wouldn't even be allowed this much.
Can someone explain how this works exactly as I am not sure on the formula? I have always believed that as long as there is enough in the equity to cover the new deposit, you should be able to release the rest.
Thanks in advance.
Adam, the banks are governed by the rules of 'responsible lending' to encourage and to ensure 'responsible borrowing' and whether we agree with their restrictive calculations or not, the equations are (currently) set based on the rental income being achieved, irrespective of property value.
I say 'currently' because in a couple of months time, if anyone owns more than 3 investment properties, they will then be deemed to be a portfolio landlord and deemed to be higher rate tax payers (and we all know how income tax is now affecting the profit of rental income) and the equations and calculations are set to be even more punitive.
The '5 year deal' offered at slightly more generous sums is to do with the perception that a landlord will be able to manage and ride-out the impending tax changes and not have to pay regular lenders charges (which eat in to profits further) during that time, too.
So, moral of the story is, rent and long term product and tax position determines borrowing amount, and if you are a portfolio landlord and need to release money from the portfolio, to do it as quickly as you can right now, before you can't from October onwards.
Email the Team at email@example.com for a Summer Portfolio Review and your money raising requirements and we'll be pleased to help.
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if anyone owns more than 3 investment properties, they will then be deemed to be a portfolio landlord and deemed to be higher rate tax payers
Why deemed to be a higher rate tax payer? I have 7 investment properties in my own name and am no where near being a higher rate taxpayer (nor would I be if S24 came into effect fully this year).
For the lenders purposes you would be deemed to be. Whether you are or not is between you and your accountant.
Let's explore this a bit further though so you can see the lenders rationale.
If you have, say, 7 properties and you get just (for example) £500 per property per month, that equates to £42,000pa. You're now in the higher rate bracket. No longer are we taxed on net profit but on gross turnover. The lenders have factored in the probable higher rate tax payments and have deduced therefore that portfolio landlords have less retained cash and so the borrowing limits have been changed.
Agree with it or not (and of course most of us don't), but this is how the banks are being restricted by the new PRA rules.
The days of building an investment on borrowings are now finished starting with little and building fast are over
Post 2007 lending changed and its going to change once more in 2017
We are in a different world now where your own cash will be king
But the question I have asked myself If I have the cash would I invest it in BTL
My answer is No?
You can invest in a lot of other areas which are more tax efficient and have slimier returns for a lot less work
If you have it now your lucky If you haven't and your starting its going to be a struggle to make a business from next to nothing
Opportunity for landlords is changing
Only Ltd Co Landlords will grow Personal Landlords Borrowing will come to a halt unless you just want to own Two or Three Properties
The Big Landlord will grow stronger because they see it as a business the Landlord who is doing this for pin money or a pension are at an end
Learn Change and Adapt ?????
I get about £50k rental income, £10k of that goes on letting agent fees, insurance, repairs etc. So I would be just below the higher rate bracket even if my finance costs (£15k) were not deducted at all.
its another nail in the coffin of BTL landlords who need to borrow
BTL will become a Rich Mans / Women's game
Cash is king and you will need cash on the hip if you want to become a large landlord
the days of remortgage to expand are over or will be soon especially in the SE of England
The new PRA regulations are going to cause a massive dry up of capital.
Such capital will remain locked up in rental property or aspirant LL savings account where it will remain socially useless.
It will result in fewer new rental properties being brought to market
The house building industry has relied on private LL capital to progress their developments.
Corporate capital is nowhere near replacing private capital and won't be for decades, if EVER!.
The PRA will see a massive reduction in LL borrowing.
BTL lenders will be twiddling their thumbs.
The only way they could gain new business is to cannibalise their competition which means they will have to offer lower rates and we mean not teaser rates, we are talking about far lower SVR to say 1% ABBR..
Essentially BTL lending will just be rearranging the deckchairs.
Lenders will simply have to reduce their profit margins and that is only if they can cannibalise their competition as there will be little new business.
If I had shares in banks I would offloading them now.
It is clear that lenders will struggle to retain their existing business levels in light of the revised PRA regulations.
MMR plus PRA is a death blow for lenders.
Great news for the rich who don't need loans.
They will reign supreme much as they did before 1997.
Of course it is the tenants that will suffer.
There simply aren't enough cash rich LL to replace leveraged LL.
That means a vastly reduced PRS.
Of course those aspirant homeowners who failed the MMR checks invariably became tenants!!
Now where are they going to live if LL can't bring new stock to market!!
Silly old Govt, they haven't really got a clue have they!?
Its the end Paul for Landlords who need to borrow to expand
Tighter lending will bring down LTV,s
so if a Landlords wants to buy they will need to introduce more cash
Just had a look at adams figs and comparing them with my area
I could buy 4 property's 3 bed houses in the NE and my rent per month would be £2400 a month shows how different areas are ?
as I said another nail in the coffin just some cant see it Yet ??
Thank you all for adding clarity. It is definitely a scary thought. What good then is appreciation if you can't release equity. It seems all the old ways of getting rich through BTL are no longer possible.
I guess the only way now to realise the increased gain would be to sell the property, however then of course there is CGT!
You can still do it, but it will take a lot of net rent after tax all costs to build up deposit funds for a new purchase.
Perhaps the new mantra is fewer, but lower leveraged properties.
But it certainly has changed things.
LL are going to have to consider the DL mantra
Learn, change, adapt!!.
Never truer words spoken!
I do wonder what everyone will do.
Interesting times ahead.
But the old concept of giving up the day job is gone.
I think perhaps FHL with the LL living on site might become more prevalent.
Gonna cause problems for all the GRQ Gurus!
Ultimately I think it will get so bad that Govt will have to reverse S24 and extra SDLT..
But before that occurs there is gonna be a lot of pain for a lot of people.