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  • Mortgages & Finance

    How to calculate how much extra I can borrow?

    pGood evening all,/p
    p /p
    pI'm trying to get my head around the maths a mortgage lender uses to calculate how much extra borrowing for which I might qualify. Here is the example I gave them on the phone:/p
    p /p
    pOriginal purchase price = £68,700/p
    pExisting interest-only mortgage = £49,781/p
    pMonthly rental income = £525/p
    pCurrent value = £113,000 (actual surveyor's may well be different)/p
    p /p
    pMy question: "How much extra can I borrow and what would it cost me?"/p
    p /p
    pThe answer came back, "£40,000 offered as a new loan, assuming 80% LTV at 4.99%. Arrangement fee 3.5% of advance and revaluation fee £120". When I asked the provider to talk me through their calculation, I got the following:/p
    p /p
    p( (rental income p.a.) - ( (outstanding mortgage) x (rent coverage, 125%) x (interest rate, minimum 4.99%) ) / (rentcoverage, 125%) ) / (interest rate, minimum 4.99%)/p
    p /p
    pAs this is a bit of a mouthful, the operator suggested I split it into three steps:/p
    p /p
    pA = (outstanding mortgage) x (rent coverage, 125%) x (interest rate, minimum 4.99%)/p
    pB = (rental income p.a.) - A/p
    pC = ( B / (rent coverage, 125%) ) / (interest rate, minimum 4.99%)/p
    p /p
    pSo, in my example this looks like:/p
    p /p
    pA = 49,781 x 1.25 x 0.0499 = 3,105.09/p
    pso B = ( 525 x 12 ) - 3,105.09 = 3,194.10/p
    pand C = ( 3,194.10 / 1.25 ) / 0.0499 = 51,208.02/p
    p /p
    pI get to this stage, and my end figure, C, isn't close to £40,000. I'm wondering whether the last piece of the puzzle is to calculate, say, 80% LTV of C to find out how much extra I can borrow, e.g. 51,208.02 x 0.8 = 40,966.42./p
    p /p
    pIf this is true, is it fair to think of each steps as follows:/p
    p /p
    pA is the minimum rental p.a. that I must attain to meet they're mortgage criteria (125% rent coverage at 4.99% interest)/p
    pB is the yearly 'profit' I world make, bas on their criteria./p
    pC is the maximum change in value of the property according to the mortgage company again using their criteria (125% rent coverage, 4.99% interest)/p
    p /p
    pSo my questions now are:/p
    ul
    liCan somebody check my maths and statements please? It's been ages since I've done algebra and I've a emstrong/em suspicion that I've wandered down the wrong numerical path.../li
    liAm I unnecessarily bamboozling myself with science? Is there a simpler way to answer the question "how can I calculate how much extra I can borrow"?/li
    liIf the surveyor's revaluation comes back differently, how would I show this in the calculation?/li
    /ul
    p /p
    pThanks for taking the time to share your thoughts, calculations, corrections and ideas!/p
    p /p
    pDavid/p
    p /p
    p /p
    p /p
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    pWell I did it a lot simpler!/p
    p /p
    p113k current value/p
    p80% of that is £90,400/p
    pLess 50k owing/p
    pEquals approx 40k additional borrowing/p
    p /p
    pThen check if the rent stacks/p
    p /p
    p£90,400 mortgage x 4.99 / 12 plus 25% is £469.89 so rental more than covers/p
    p /p
    pDo bear in mind this being TMW its 4.99% or the pay rate strongwhichever is the higher/strong and better products given fees are more likely higher but it’ll still stack./p
    p /p
    pIf you know the rental you can work backwards to get your borrowing which is what they’ve told you but I always find it easier to work forwards and play about with the figures./p
    p /p
    pYou can only borrow x% of whatever it values at so all your need to know is based on  the product I want what rental do I need and have I got it./p
    p /p
    pRemember each lender uses different % cover and rates its based upon./p
    p /p
    pFailing all the above you could use the attached or a broker!/p
    p /p
    pLisa/p
    pa href="https://www.keys-mortgages.com" target="_blank"www.keys-mortgages.com/a/p
    p /p
    p /p
    p /p
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    Lisa All comments are for education and information purposes only and do not construe as advice or a financial promotion. No liability is accepted for comments made. If you wish to receive information in an advisory capacity then please contact me about becoming a client. www.keys-mortgages.com

    pHi David/p
    p /p
    pOption 2 - try a target="_blank" href="https://www.themoneycentre.net/getquote1.asp?pagelink=btlquote&type=2"this/a/p
    p /p
    pWe're still working on the new viability calculators which will be launched in the coming weeks on Property118.com.  It's come on leaps and bounds since I showed it to you when you came over last month./p
    p /p
    pLisa, you can have a tracking URL to the new calculator to use on your web-site if you like.  It will add value to your web-site, it's a great tool for you and your clients to use, it's free and you will get copied into all registrations from users that you refer to it.  Therefore, it will also be a fantastic lead generation tool for you./p
    p /p
    pWatch this space./p
    p /p
    pRegards/p
    p /p
    pMark/p
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    Regards


    Mark Alexander - Property118.com
    Twitter: @iAmALandlord
    pLisa highlights a good point. You can work 'forward' to see what a given level of rent will equate to in terms of borrowings / deal size or you can work 'backwards' to see what a specific deal can qualify for./p
    p /p
    pGet comfortable with the numbers and working in both directions. It helps you hunt better when you know what to look for and it helps you know what loan options will apply for a given deal./p
    p /p
    pJohn Corey/p
    pFollow me on Twitter-> a href="https://www.twitter.com/john_corey" target="_blank"www.twitter.com/john_corey/a/p
    pa href="https://www.ChelseaPrivateEquity.com/blog" target="_blank"www.ChelseaPrivateEquity.com/blog/a/p
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    John Corey 


    I host the London Real Estate Meet on the 2nd Tuesday of every month since 2005. If you have never been before, email me for the 'new visitor' link.

    PropertyFortress.com/Events

    Also happy to chat on the phone. Pay It Forward; my way of giving back through sharing. Click on the link: PropertyFortress.com/Ask-John to book a time. I will call you at the time you selected. Nothing to buy. Just be prepared with your questions so we can use the 20 minutes wisely.

    pThanks Lisa and Mark for your calculations, will work through them both today./p
    pThanks to John also./p
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    pYou're welcome Dave/p
    p /p
    pIf you would like me to punch some numbers into my new model by all means email me and I will email the results back to you./p
    p /p
    pRegards/p
    p /p
    pMarkbr/br/citeDavid GW Bartlett said:/cite/p
    blockquotedivpThanks Lisa and Mark for your calculations, will work through them both today./p
    pThanks to John also./p
    /div
    /blockquote
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    Regards


    Mark Alexander - Property118.com
    Twitter: @iAmALandlord