A leading expert in the field of property investment financing has revealed the six key criteria that lenders look for when approving new borrowing to fund a property portfolio.
Aviram Shahar, CEO of online property lending tool, Lendlord, has shared his expertise with the publication Property Reporter on what banks and other lenders most commonly consider when deciding on property portfolio financing.
While each lender will have its own unique set of criteria, which change regularly, Aviram Shahar says that there are six basic things that all lenders look for.
Existing buy to let (BTL) mortgages
Lenders will often judge their decision on whether an investor has existing BTL mortgages. In some cases, they may limit the number of existing mortgages to five, but some will allow up to 10. If an investor has more BTL mortgages Shahar says that there are specialist lenders who will still finance new acquisitions.
Total mortgage balance
As well as looking at the number of mortgages an investor has, lenders will also consider the total mortgage balance across an existing portfolio. Some will have a limit on the total amount of indebtedness an investor can have, while others will limit the total amount they will lend to an individual borrower – a person or limited company – across an entire portfolio. This may mean that lenders may not be willing to lend to the same person or business multiple times.
Loan to value (LTV)
Many lenders see the average LTV across an entire portfolio as an indicator of the risk involved in lending. In most cases, the lower the LTV across a portfolio, the less risk there may be involved and so lenders are more likely to lend. This may also be reflected in the rates that are available to the borrower.
Property interest cover ratio (ICR)
The ICR works as a stress test against varying rates of interest. Most lenders will use this to test whether or not the rental income will cover the mortgage costs for the property should interest rates increase to a certain level. This is somewhat similar to the affordability tests run on regular mortgages, which confirms a borrower can cover their debts should interest rates suddenly rise.
Portfolio interest cover ratio (ICR)
Lenders will also conduct a similar stress test against an entire portfolio using different rates of interest to ensure that the wider collection of properties would not prevent a borrower from meeting the agreed-upon repayments.
Most lenders will want to see a minimum income of at least £15,000 outside of a person’s property portfolio, according to Shahar. However, they may need to see more depending on the level of finance required and the size of an existing portfolio. This should ensure that a borrower has sufficient income to cover repayments if they are unable to obtain income from the property due to rent arrears or a lack of tenants.
Alongside these checks, many lenders will also confirm credit history and conduct a property valuation before deciding whether to lend or not. Shahar said that each of these criteria is interlinked and are rarely considered on their own when making a loan.