Below are various examples of calculations used by professional investors and buy to let mortgage lenders to assess the viability of a property investment.
Case study
Let’s say you’ve seen a three bedroom flat advertised for £170,000 and you want to work out your monthly mortgage interest payments.
How does buy to let work for calculating mortgage interest payments?
Example
Property price £170,000.
Maximum loan to value at 85% of £170,000 = £144,500
Mortgage of £144,500 x 5.5% (interest rate) divide by 12 months
= £662 monthly mortgage payments
The next example shows how the lender assesses the maximum loan they will lend based on the rental income of a property?
Example
If the surveyor valued a monthly rental for this property at £860 then the maximum loan a buy to let lender will lend for this property will be
£860 x 12 months = £10,320 divide by 130% = £7,938 divide by 5.5% interest rate
= £144,335
This next example shows how to calculate a rent to interest cover in percentage terms.
Example
Purchase price £170,000.
85% Buy to let mortgage = £144,500
We know the monthly repayment for this loan is £662
We also know the rent received from the tenant is £860 per month.
If you now divide the monthly interest by the rent you get the rent to interest cover
£860 x 100 = 130% £662
Some mortgage companies only require 125% rent to interest cover so you only need to receive £827 per month from the tenant
Blink
Del.icio.us
Digg
Furl
Google
Simpy
Spurl
Technorati
Y! MyWeb