If you're considering investing and looking at Buy-to-Let mortgages in the UK, there's a crucial term you must understand: Mortgage Cover Rate or Interest Cover Rate (MCR / ICR)! 📊
🔍 What is it? Mortgage Cover Rate (MCR) is a vital concept for lenders when you're considering a Buy-to-Let mortgage. It's a measure of how well your rental income covers your mortgage payments. In simpler terms, it's a financial safety net to ensure you can meet your obligations as a landlord and cover the costs of the lending based on the assumed and likely rental income.
📈 Why does it matter? Lenders use MCR to assess the risk of lending to you. They want to see that your rental income comfortably exceeds your mortgage payments, leaving you with a financial cushion. Typically, lenders look for an MCR of 125% or more. So this basically means your rental income needs to be 125% of the monthly mortgage interest.
🏠 How is it calculated? MCR is calculated as a ratio, comparing your expected rental income to your mortgage interest payments. Let's break it down with an example:
Monthly Rental Income: £1,000
Monthly Mortgage Interest: £800
MCR = Monthly Rental Income / Monthly Mortgage Interest MCR = £1,000 / £800 MCR = 1.25
In this case, your Mortgage Cover Rate is 1.25 or 125%.
This means your rental income is 125% of your mortgage interest, meeting the typical lender requirements.
Analysing a Potential Buy to Let:
Let's imagine you have your eye on a property, that you think would make a great buy to let investment. First of all, you need to calculate the MCR / ICR to understand if it's mortgageable.
If it falls below the 125% you are unlikely to be able to obtain a buy to let mortgage as it does not meet the threshold set by most lenders in the UK.
*If you are a higher rate tax payer you will likely need a bigger percentage of around 145%.
💡 Top Tips:
1️⃣ Confirm with your lender: Different lenders may have varying MCR requirements, so it's crucial to understand their specific criteria. Ask them what their MCR is and go from there.
2️⃣ Future-proof your investment: Ensure your rental income comfortably covers your mortgage, even if interest rates rise. Many investors are now selling their buy to lets due to them becoming unprofitable due to the rising interest rates.
3️⃣ Diversify your portfolio: Having multiple properties can spread risk and enhance your overall Mortgage Cover Rate. Look at other investment strategies in property.
🏘️ Why Consider Alternatives like BRRR 🏘️
In today's property market, many investors are finding it increasingly challenging to identify viable Buy-to-Let opportunities due to inflated and overpriced properties, high upfront costs, and the potential squeeze on rental yields from increased taxation.
As a result, investors are exploring alternative strategies like BRRR (Buy, Refurbish, Rent, Refinance) to adapt to the current market .
BRRR offers several advantages:
Value Addition: BRRR allows you to add value to a property through renovation or improvement, potentially increasing its rental income and overall value.
Lending and Funding: You can access 'bridging finance' to help you purchase the property so you only need 20 to 25% of the purchase price.
Greater Control: With BRRR, you have more control over the property's condition and can tailor it to attract higher-paying tenants.
Liquidity: Refinancing after renovation can free up capital for additional investments and allows you to recycle your original capital and continue building your portfolio using less cash and the profits from adding value.
Diversification: It's a way to diversify your property portfolio and mitigate risk.
Understanding Mortgage Cover Rate is essential for Buy-to-Let success. However, considering the current market challenges, diversifying your property investment strategy with approaches like BRRR can be a smart move.
The TV program 'Homes Under the Hammer' shows people buying property at auctions who do them up, add value and either rent out or sell. This is exactly what BRRR is!
However, it's the way you fund the purchase (quick finance like bridging) that allows you to buy at auction and move quickly using less of your own cash.
Having the knowledge about how to use creative strategies is vital if you don't want to be a one trick pony who is exposed to the changing conditions in the UK property market.
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