Buy-to-let In the face of adversity

Given up your dreams of becoming a landlord because of bad credit? There could be hope yet. Laura Brady reports

Once upon a time having bad credit left you at the bottom of the social-financial ladder with little opportunity to climb to back up again. These days however there are second chances at every turn – you can even become a property investor.

What constitutes bad credit?

Having bad credit usually means that you have had County Court Judgments (CCJs) made against you from creditors or been in arrears with your mortgage repayments. It could even be that you have been bankrupted in the past and been discharged, or carried out an IVA (Individual Involuntary Arrangement) – the forerunner to bankruptcy.

Each of these will stay on your credit file – held by credit reference agencies, Experian or Equifax - for six years but this doesn’t mean to say you will not be able to borrow during this time. “We just keep the factual history,” says James Jones, consumer affairs manager at Experian, “whether or not you will be able to borrow is entirely down to the lender.”

Mortgage lenders, like any other, will each have different limits at when they turn down your business. In turn, this will hinge on factors such as their market proposition, rates of interest they will charge and the size of your deposit. But, whereas traditionally this flexibility only applied to residential property, you can now apply for a buy-to-let mortgage with bad credit.

Where do I start?

If you have got mortgage arrears you will immediately be discounted from all high street lenders that offer buy-to-let products such as Standard Life and Abbey – and even specialist buy–to-let loan providers such as Mortgage Express, Capital Home Loans, Paragon and BM Solutions. Martin Reynolds, head of sales at BM Solutions - the specialist lending arm of Halifax – says that borrowers’ credit history is required to be completely clean for four years before they will be considered.


Going through the application process with a standard lender like this -and being turned down - will not do your credit score any favours so it’s a good idea to seek independent financial advice before you start (see box). Nearly all sub-prime buy-to-let lenders will only receive business through intermediary channels anyway.
But when dealing with any intermediary honesty is the best policy, says Jonathan Moore at buy-to-let broker, Mortgages for Business. “This type of loan application can often be very lengthy. Sometimes customers don’t mention they have got CCJs but it will always come out further down the line and knowing would have saved a lot of time. The one piece of advice I would give a potential property investor with bad credit? Be upfront about it from the start.”

What lenders do it?

Sub-prime residential lender of 10 years, Kensington Mortgages, has just expanded into buy-to-let loans for borrowers with credit problems on both purchases and remortgages. The move is partly in response to a renewed interest in the rental market, explains Ian Giles, marketing director for the lender.


This view is supported by a lettings survey from the Royal Institute of Chartered Surveyors (RICS) issued in February. It found that landlords are currently enjoying the biggest increase in tenant demand in four-and-a-half years. According to the report, over a quarter of landlords (27 per cent) reported a rise in tenants rather than a fall during the months of November, December and January.


“We think this is partly due to a renewed upturn in house prices, pushing potential buyers back to the rental market,” says Giles. “But many would-be landlords, who have had credit problems in the past, are missing out as they are unable to get a buy-to-let loan - so we took the opportunity.”


Other specialist lenders that provide investment mortgages to borrowers with credit problems are, Rooftop Mortgages and Preferred Mortgages. Platform Homeloans and GMAC also both have non-conforming buy-to
let products.

What’s the catch?
Interest rates: Any borrower considered to be ‘high risk’ will pay for it. Rates are higher on buy-to-let mortgages already. This is because the borrower is not living in the property and is therefore deemed more likely to default on the loan. Add bad credit to this and it pushes the rate up even further. “Even if you can prove you are getting a good level of rental income, lenders may not be convinced that you will choose to pay your mortgage with it,” says Moore.

The interest rate you pay will depend on the level of your credit problems. For example, how many CCJs you have and how recent they are. “In our experience rates generally start from around two per cent above base – currently 6.5 per cent,” says Moore.


Fees: Lender fees may also be higher on sub-prime buy-to-let mortgages. “Lenders in this field can often charge up to two or three per cent of the loan,” says Moore. “This contrasts to a one per cent fee or even a flat £495 charged on standard buy-to-let mortgages.” He adds that broker fees may also be steeper as the application process is more complex.


Finding a deposit: Sub-prime borrowers will also need to find a sizeable deposit. For standard buy-to-let property, the deposit required is traditionally between 15 and 20 per cent, but Moore says that adverse borrowers may need a benchmark sum of up to 30 per cent. Paul Hunt, head of marketing at Platform Homeloans, says: “The fact that we ask for 85 per cent LTV on our standard buy-to-let range and 75 per cent LTV on the non-conforming range recognises this extra risk.” Another potential hurdle could be raising the cash. Many homeowners do this by remortgage their current home and releasing equity but bear in mind that, by taking this route, your credit background is likely to rear its head again.


What’s out there?
Minor adverse: Products available for borrowers with a light spattering of credit problems do not deviate too much from standard buy-to-lets. Kensington ‘minor adverse’ mortgages apply to borrowers with CCJs
that have been satisfied in the last two years and/or have secured loan or rent arrears that have been cleared in the last 12 months.


On this basis the lender offers a three-year fixed rate priced at 5.94 per cent, which even extends to a 90 per cent LTV. Kensington also offers a two-year fixed rate and two-year discount both priced at 6.04 per cent to minor adverse borrowers. “And for a 0.1 per cent loading on these rates, borrowers can benefit from flexible features that allow them to over and underpay, take payment holidays and borrow back from the loan,” says Giles.

Light to medium adverse: Platform Home Loans – the intermediary lender of Britannia Building Society – is a standard buy-to-let lender that also offers a non-conforming mortgage range. These loans are all accessible to borrowers at the ‘lighter end’ of the adverse spectrum, which constitutes £3,000 worth of CCJs, two mortgage arrears, and a discharged or completed bankruptcy or IVA – all within the last 12 months.

On this basis, a borrower can qualify for a three-year fixed rate priced at 6.9 per cent or a two-year fix at 6.95 per cent – both at 75 per cent LTV or under. The deals come with early repayment charges of six per cent of the amount redeemed for the respective length of the deals. The lender also offers a one year-tracker, priced at 1.75 per cent over LIBOR (London Inter-bank Offer Rate), currently 6.37 per cent. However, although this comes with redemption penalties two years after the deal has ended.

Heavy/unlimited adverse

If your recent credit history is far from pretty, you may still be eligible for a buy-to-let loan, but it could prove better value to wait until the worst on your record has cleared. Kensington’s two-year fixed rate for borrowers with unlimited credit problems – that’s anything beyond £12,500 in CCJs and more than five mortgage arrears in the last 12 months – will cost you 7.04 per cent, reverting to 7.74 per cent at the end of the deal. The £695 completion fee and broker fee of 0.75 per cent that apply to all of Kensington’s non-conforming buy-to-let loans,
may also be more of a consideration!

NOTE! Any adverse borrower that pays a mortgage successfully for a three-year period is no longer classed as adverse, so avoid tie-ins for any longer. “The average time a borrower spends on our nonconforming product is 39 months,” says Hunt. “Once the credit is repaired the adviser is perfectly within their rights to look for a more
competitive deal on behalf of the borrower.”

How is my borrowing calculated?

Standard borrowing on buy-to-let is calculated on a ‘rent-to-interest’ ratio. This means that you must receive 125 per cent of the interest part of your mortgage repayment in rental income, although some lenders require 130 per cent. But the rate of interest used in the calculation may not necessarily be the headline rate of the deal.
Usually the lender’s higher standard variable rate (SVR) – also known as a ‘reversion rate’ – is employed.

“But this is the problem,” says Moore. “If the interest is too high – as it could be with some sub-prime buy-to-let lenders, the sums simply won’t add up. After all, just because you are paying more in interest, it doesn’t mean that you can charge more rent from your property – it can be an impossible calculation.” In this case there becomes a natural limit at which borrowers with bad credit may have to give up their property-investment dreams.

It’s getting better all the time…

However, things are getting easier. For example, last July, Platform reviewed its affordability criteria across on its non-conforming range of fixed rate buy-to-lets. “The rent-to-interest on these products used to be calculated on our reversion rate, which is UK LIBOR plus 3.5 per cent but now it is calculated at the headline rate.” In current terms, this means that the level of interest employed has decreased from 8.12 per cent down to as little as 6.37 per cent - the rate payable on Platform’s non-conforming one-year tracker mortgage. “This amendment has seen take-up of these products increase dramatically,” says Hunt.

And for sub-prime borrowers wanting to get into buy-to-let, there has never been a better time, says Ray Boulger, senior technical director at John Charcol. “Lenders are softening their buy-to-let lending criteria where appropriate in the light of their increasing experience in this market and in particular they are being more practical in terms of affordability,” he says. “Higher LTVs and more flexibility across the whole spectrum of mortgage products have been possible due to a less risky arena resulting from benign base rate environment - which is expected to continue into this year.”

No looking back

Once on the investment property ladder, it could well be a case of never looking back – especially after three years when your costs are likely to have considerably decreased. As well as the benefit of equity rises in your property today’s landlords are reaping the benefits of good rental returns according to Standard Life.

A recent study from the bank revealed that a quarter of landlords currently earn up to £200 more than their mortgage commitments every month. The survey also found that 27 per cent are earning between £200 and £500 a month extra, and 13 per cent are earning up to £1,000 - purely in rental income. Just what you need to ensure you have seen the back of credit problems for good…