West Brom for Intermediaries has become to latest buy-to-let lender to announce a reduction in its rental cover requirement to 100%. The rental percentage is one measure of the lender's perceived risk when assessing the amount it is prepared to advance to a prospective buy-to-let landlord.
A 100% rental cover makes it appear that the landlord needs no surplus income from his rental when compared with the cost of his mortgage. But whilst a figure of 100% may grab headlines, it doesn't always tell the full story, as Alan Harper, Senior Analyst at eMoneyfacts.co.uk explains:
"On the face of things, the move by West Brom Intermediaries looks like good news for borrowers. Previously the lender had a minimum rental cover requirement of 120% based on using an interest cost of 4.85% - equivalent to the lowest initial pay rate from its current buy-to-let product range. But now the lender is basing the calculation on a notional rate of 1% above Bank of England base rate, that is, 5.75%.
"However most of the buy-to-let products currently available from West Brom actually carry an interest cost less than 5.75%. In other words, the actual cost of the mortgage is likely to be less than the amount the lender is asking the borrower to cover. So in this case 100% rental cover actually sounds a lot better than it really is.
"What's more, if, as is widely predicted, the Monetary Policy Committee decides to increase base rate at its November meeting, borrowers could be disadvantaged still further by the West Brom move.
"A simple example best illustrates the point. On an advance of £100,000, using an interest rate of 4.85%, as previously stipulated by West Brom, a rental cover of 120% would mean the borrower would need a monthly rental of £485 to provide the level of cover required. Now, using a rate of 5.75% and a rental income cover of 100%, the borrower would need a monthly rental of £479 to borrow the same amount, only £6 less. And if base rate goes up by 0.25%, the rental figure needed goes up to £500 per month - £21 more than before. This could make the move by West Brom look like a pre-emptive strike as a means of tightening its lending book ahead of a base rate change.
"West Brom is not the only lender to introduce a 100% rental formula recently. Bank of Ireland Mortgages and Bristol & West Mortgages did likewise last month, reducing the rental cover from 115% to 100%, but on all products other than fixed rates of three years or more, increasing the rate used in the calculation from 5.70% to 6.50%. On a typical £100,000 advance the monthly rental needed has gone down by a mere £4, from £546 to £542.
"Other lenders with 100% rental cover take a different tack. The Mortgage Works, for example, loads its arrangement fee by 1% if the borrower can meet no better than a 100% rental cover, meaning some products carry a whopping 2.5% fee - £2,500 on a £100,000 mortgage.
"So while 100% rental sounds good in theory, advisers need to be on the ball to ensure lenders' requirements are looked at in the round before making a final decision."
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