Changes to Property Finance – The London Issue
In London and the south-east financing commercial property is much less about loan to value and far more about rental yield. The way in which lenders are now calculating rental coverage ratios could well make financing commercial and semi-commercial property in London and the South East far more difficult.
The challenge lies in that rental yields as a percentage of property value are much lower in London and the South East than they are in other parts of the UK. Ironically, this does not make property investments less attractive, rather they continue to offer potential for good capital growth and good income.
The PRA Introduced Affordability Checks
Since the beginning of this year the PRA have introduced new guidelines surrounding how lenders assess the affordability of buy to let mortgages, this includes those mortgages for commercial and semi-commercial property.
These changes have meant that rental income from investment property now needs to cover the finance costs by a much higher percentage. Traditionally lenders would have looked for 120% or 125% ratio of rental income to finance costs. This ratio has now increased to anywhere from 140% to 200%.
In London and the South East the price of commercial and semi-commercial property has risen far faster than the rental income it generates. This means that more properties in this area will suddenly become much harder to finance.
This is where property investors need to be slightly more considerate in how they structure their borrowing and spend a little more time upfront considering how these deals should be financed.
It remains an irony that many lenders still prefer the London and South East region as an area in which they want to do property lending, yet their own guidelines work against it.
Traditionally property investors always based and what they can borrow on the loan to value ratio, however whereas in the past borrowing at circa 70% loan to value would have given you a rental cover of around 125%, this is no longer the case in London and the South East.
This is where consideration needs to be given at the outset, let me try and explain.
How You Borrow, More Important Than Ever
There is a difference of opinion between commercial lenders and the PRA in what makes a loan affordable. The PRA will regulate some types of borrower and not others. We are seeing this difference of opinion start to show in the lending criteria being offered to different structure of borrowers. It does appear that whilst lenders are governed and obliged to follow PRA rules there is a very different opinion of what makes borrowing affordable depending on whether you ask the lender or the regulator.
The property investors who are looking to buy commercial or semi-commercial investment property in London or the South East then the norms as you once knew from need to be discarded and advice taken on the best way to structure and propose your deal to the lender.
Issues such as whether you borrow in a limited company or LLP, whether you borrow on variable or fixed rate and whether you borrow over a 3, 5 or 10 year term can all greatly impact on whether you get the borrowing as they all form part of the new affordability calculation.
For property investors looking to finance purchases in the London or South East region then please do get in touch as the small things are having a massive impact, you only get one chance to get things right and you really don’t want to lose out potentially profitable property investment.
Any questions about purchasing commercial property then please do get in touch or use the form below and we’ll get right back to you.
By Dave Farmer