Thus, it was interesting to note a brief exchange in the House of Lords last year, which resulted in the release of HMRC data, showing just how many people derive income from property, according to their self-assessment tax return.

The number was 2.65 million. It is a huge figure, encompassing some 31,380 landlords in Barnet, 27,060 in Birmingham, 1,070 in Clackmanshire, and a small collection of 190 on the Isles of Scilly.

The publication of the data, and the noise it generated in July 2021, served as a timely reminder of the breadth and variety of people that make up the UK’s landlord community. Indeed, it is something worth reiterating regularly, given the term ‘landlord’ is often bandied around as a useful catch-all for such a large, diverse group of people.

As a lender, the creation and delivery of financial products must start with the fundamental understanding that each client is different. While considering their financial circumstances, how much they want to borrow, for what asset, and for how long, it is also vital to recognise their motivations and attitudes.

When MFS launched its range of BTL mortgages earlier this year, this was firmly at the heart of its plans.

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Rental income vs repayments

In most instances, the viability of a BTL loan will be determined by the relationship between the rental income a property generates and the cost of the loan. This, the interest cover ratio (ICR), will be enough to rule out many prospective borrowers. For instance, a lender might require an ICR of 120%, meaning that if a landlord’s BTL mortgage repayments each month are £1,000 then their property must achieve a rental income of at least £1,200. 

On the surface, such principles are entirely sensible. Just as with a consumer mortgage, these checks and balances are designed to protect both the lender and borrower.

However, there are always exceptions to the rule. A more flexible approach is required to assess the borrower’s longer-term plans and establish the right criteria on which to judge the viability of the deal.

This is particularly pertinent in light of house price changes over the course of the pandemic. In April 2020, the average UK house price was just over £230,000; by the end of 2021, it had reached £275,000. In London, the average house price is now at £530,000.

As prices increase, so too does the amount BTL investors typically need to borrow. In turn, so does their monthly repayment. And while rental prices have also risen, they do not always track alongside house price growth. Again, this underlines a need for a more flexible approach than simply applying a minimum ICR threshold.

Allowing for flexibility

We use several methods to make the affordability of our BTL mortgages more flexible. Rolled-up interest is one such example; months of interest that are not paid at the start of a mortgage are instead added to the outstanding principal amount of the loan and paid at redemption.

Deferred interest is another. By reducing the interest paid during the term (eg taking 1% off the rate), the rent goes further and provides a larger loan, or enables cashflow freedom during the loan to pursue other investments. 

And, finally, top slicing from wealth (not just from surplus income) can provide lender assurances about the ability of a landlord to pay unexpected maintenance costs or voids. 

The valuation process is another important element in trying to see the bigger picture. Many valuers acting for a lender will take a snapshot of a property’s value or its expected rental income as it stands in the current market. However, when uncertainty abounds, their predictions will naturally be dampened, placing a squeeze on what finance providers are willing to offer to a borrower. However, flexibility can still make a case fit.