Fun with numbers (3)

From The Times;

Last April there were 2,990 buy-to-let mortgage products available, with an average rate of 5.23 per cent. Today there are 597 products, with an average rate of 6.75 per cent. Some specialist lenders, including Mortgage Trust and Paragon, have stopped offering buy-to-let deals altogether.(1)

Last year lenders would loan up to 90 per cent of a buy-to-let property’s value (LTV), but most landlords now need to raise a deposit of 25 per cent to obtain a mortgage.(2)

Landlords have also been hit by lenders’ demands for increased rental cover — the amount of rent that covers the mortgage. Last autumn landlords only needed 100 per cent rental cover but lenders are now insisting on 120 or even 130 per cent.(3)

(1) An interest rate hike from 5.23% to 6.75% would depress property prices by around 22%, for example £100,000 x 5.23% = £5,230. £77,500 x 6.75% = £5,231.

(2) Fundamentalists think that increasing the required deposit from 10% to 25% would reduce prices by 60%, i.e. if you have a £10,000 deposit, that's a 10% deposit on a £100,000 property but a 25% deposit on a £40,000 property. This is almost certainly exaggerated, the question is, by how much?

(3) Increasing rental cover from 100% to 130% would depress prices by around 23% (i.e. 1 minus 100/130).

Or, if you want to really knock yourself out, we can combine (1), (2) and (3).

Assume that up to now, BTL-er has been receiving £4,707 rent p.a. (£90 per week), which is 100% rental cover on a mortgage of £90,000 x 5.23% on a property 'worth' £100,000 in which he has 10% equity. When he comes to remortgage, the bank will say "£4,707 divided by 130% = £3,621, £3,621 divided by 6.75% = £53,641. Therefore we can only give you a loan of £53,641 on that property".

So our BTL-er faces a stark choice: either
(a) stump up £36,359 to make up the shortfall (£90,000 minus £53,641), or
(b) sell the property to another BTL-er who happens to have a £17,880 deposit and is happy to pay £71,521, which is the highest price that will work under the stricter lending criteria. Of course, under option (b) the original BTL-er loses his original £10,000 deposit and still owes the bank £18,479. Ouch.