Affordability issues can hold back a BTL investment strategy. But that doesn’t mean there are no ways forward when they emerge.
At Market Financial Solutions, we have a range of tools at our disposal to make the ICR fit. They may prove especially useful where landlords may not be able to generate quite enough income from their assets as they’d like.
Let’s take our residential, fixed-rate BTL mortgages as an example. Our minimum ICR for a 2-year fixed residential BTL mortgage is currently 125%. A borrower may apply for a 2-year fixed loan of £500,000 with a 5% interest rate.
To meet the required ICR minimum, they’d need to generate £31,250 in rental income from the property. But, given a decline in the market, and/or certain legislative limitations, the borrower in question can only generate £25,000 in income.
This isn’t enough, but that doesn’t mean we can’t find a solution for them. To make the deal work, we could utilise a rolled-up interest plan.
With rolled-up interest, the borrower could cover our funding using only £20,000 from their rental income, and roll up the remaining £5,000. Over the 2-year fixed period, the rolled-up interest would allow the borrower to hit that 125% ICR minimum.
Us as the lender would need to ensure the exit strategy was also solid to keep this deal feasible. There are many potential options here, although one of two are likely to take precedent. The borrower could plan to refinance with a long-term lender as they reached the end of our facility – for which we would need to see evidence and clear planning. Or, they could sell the rental property and use the proceeds to cover our loan.
So long as the exit strategy fits in with their circumstances, we are happy to accommodate it. Also, rolled-interest is just one of numerous options we can utilise to support expanding landlords. We’re happy to share all our options with those who reach out to us.
FAQs
How can I overcome my affordability issues?
Market Financial Solutions provides several bespoke solutions to help borrowers address affordability challenges. Our Interest Coverage Ratio (ICR) tools include rolled-up interest, which allows up to nine months of interest payments to be added to the loan and deferred until redemption. Deferred interest enables borrowers to postpone up to 2% of interest over the initial term, reducing monthly instalments and easing cashflow. Top-slicing is another option, where surplus rental income, salary, or liquid assets can be taken into account to support the ICR calculation. These strategies can be used individually or combined to maximise borrowing capacity while maintaining compliance with ICR thresholds.
Have affordability issues in the current market eased?
Affordability remains one of the most pressing issues in the UK housing market. Although mortgage rates have started to decline and wage growth is offering some relief, housing costs are still elevated. Recent data shows renters spending approximately 34% of their gross income on housing, up from 32% in previous years. Nationwide reports indicate that monthly mortgage payments for first-time buyers consume around 36% of take-home pay, which is higher than the long-term average of 30%. However, with falling mortgage offer rates and the relaxation of some affordability tests by regulators, the outlook is gradually improving and more borrowers are expected to regain access to the market in the coming year.
Do your affordability tools apply to buy-to-let mortgages and bridging loans?
Yes, we apply our affordability tools across both buy-to-let mortgages and our Bridge Fusion product. Borrowers can benefit from rolled-up interest, deferred interest, and top-slicing within the residential and semi-commercial buy-to-let mortgage ranges. For bridging clients, the Bridge Fusion product offers a hybrid solution that merges the flexibility of bridging finance with the structure of a longer-term buy-to-let loan. It supports features such as rolled-up interest for six to twelve months, up to 2% deferment, and more relaxed ICR testing. This makes it ideal for projects requiring medium-term funding or time to stabilise rental income before transitioning to a standard BTL mortgage.
Can I use your ICR tools as a first-time landlord?
Yes, we can apply our ICR tools to first-time landlords. This means you can take advantage of rolled-up interest, deferred interest, and top-slicing of up to 20% of rental income. Our underwriters may also consider personal income or assets in the assessment, providing additional support to improve affordability and increase the chances of a successful application.
