A new deal launched by Foundation Home Loans offers landlords a loophole in the current strict borrowing environment, allowing them to borrow more on their buy-to-let mortgage without locking into a deal for a full five years.
Currently, landlords have to choose between committing to a fixed-term deal for at least five years or facing the strict affordability rules limiting the amount they can borrow in relation to their rental income. Foundation Home Loans is offering landlords the opportunity to qualify for the more relaxed rules a five-year fixed rate delivers without locking in for the full term.
More rigorous stress testing of rental income has meant that many landlords have been forced to bind themselves to five-year fixed deals. Where previously lenders would accept 125% rental coverage at a lower mortgage rate, today the Bank of England’s stricter rental income rules means that shorter-term mortgages are only approved if the rental income can cover the landlord’s mortgage payment if their mortgage rate went up to 5.5%, i.e. if the rental income would cover the mortgage by a ratio of 145%.
Five-year terms with flexibility
However, the new deal from FHL gives landlords five-year fixed deal terms, with the opportunity to leave after only three years without early repayment charges; meaning landlords get the flexibility of a three-year deal without having to pass stringent affordability checks and facing financial penalties for leaving early.
Although more expensive than comparable deals on the market, available at 75% loan to value (LTV) at 3.55% and 65% LTV at 3.30%, it means a landlord could rent out a property for less. For example, a £150,000 mortgage on a comparatively priced two-year fixed rate would need to rent at £996.80 per month. However, because lenders can be more generous on stress tests for five-year deals, the landlord could rent the property for significantly less at £859.38 per month.
David Hollingworth, of mortgage broker L&C, said: “This product looks to offer the opportunity to lock into a rate but only be tied to that rate for the first three years, effectively opening up the option to review the product at that point and choose whether to continue, switch to another deal or potentially even sell the property without incurring a penalty. That could be a useful feature for some landlords, but there is a price attached to that.”
The deal is available to both portfolio and non-portfolio landlords, including limited companies, but can only be accessed via a broker. However, borrowers will need an almost perfect credit score to qualify.