ASK518: Help! Lenders are declining me PLUS: Why interest-only mortgages?

0:02Rob D:Hi, I'm Rob. And I'm Rob. And this is Ask Rob and Rob. Hey everyone, welcome to Ask Rob and Rob, the show where you give us your questions and we return with answers. This show has been running a long time, probably for two reasons. One, we're consistently answering your questions and trying to be helpful. But two, we also make it really easy for you to get your questions in. So let's give you a quick reminder of how you can follow that easy process. So easy. All you've got to do is go to propertyhub.net slash And once you're there, you can leave us a written question for the Sunday Times if you'd like to, or you can be our favorite person and leave us a voicemail so we can play out your question right here on the podcast.

0:39Rob D:Just like we're about to now for Irfan. Good evening, Rob and Rob. Hope you're well. I am Irfan. I live in Sutton. Since past 10 years, I've been investing into properties. All I've been doing is invest, invest, invest. My primary source of income is coming from an IT company. So what I've been doing is I was leaving on an average loan to value on each BTL mortgage was about 50 to 55%. So I'm up to that. So I've got a good leverage on it. But recently, what I did was I got this new build, ground up development. I just thought to consider on this side of things. So everything has started and the construction got started and everything.

1:18and at the time of remortgage of our existing one of our existing bdl mortgages i applied for releasing the equity and i thought i could just raise some cash so that i can adjust through it and then remortgage once the development is up so the lenders what they have been doing is like you know they ran the affordability test despite leaving 75 of the loan loan value which should be fair as opposed to the general belief everybody's saying that you know btl when it comes to btl they don't care about your affordability or income generally they care about rental income and everything but still they did affordability test and it turns out that you know they found the dip over one of our year's income you know the turnover and i tried explaining them that even though the turnover of this limited company has dipped but i was actually busy making money through different contract, which was a PAYE.

2:11But they never cared. You know, they basically rejected. So that got me something from this thing. Maybe leverage, we are relying so much about leverage and everything. But what if at some point when I retire, my primary source of income will be almost dripping down? And what if the lenders, they don't even care about the leverage? And then I end up in a situation of asset rich but cash poor in a worse way. So just wanted to check, maybe the leverage that we talk about is just a bubble. I don't know, but I just wanted to get your perspective on this. So I'm just trying to get my head around. What if when I decide to retire and my primary source of income has dipped over and then I've never released any equity in the mortgages or anything what if i wanted to release some equity to adjust cash elsewhere so in that situation what if you would you would do have you come across about this situation ever before or what is your perspective i really wanted to know and continue what you're doing you are really helping people like me more power and leverage to you thanks bye thank you for your question and

3:25Rob D:props to you for doing a ground-up development that is some serious work and i hope it works out well for you. In general, I'm surprised to hear that you've had this issue. It's not normally something you'd come up against if you have got a healthy personal income. Even if that personal income has dipped, as long as it's above the lender's maximum, I wouldn't expect it to be a problem. And I'm wondering if there's something specific to your circumstances that was going on here. It is worth keeping in mind that if you are raising capital against your existing portfolio, as opposed to taking out a loan for a new purchase, or just remortgaging, but not adding anything to the loan amount that is a very different situation if you're capital raising you are going to come under more scrutiny they're going to be interested in what you're using the money for and as a portfolio landlord which means you own four or more properties that puts you in a different category when it comes to regulation and then you look at your portfolio as a whole and do an assessment of your affordability in the round rather than just looking at the individual property which is what would happen if you weren't classified as a portfolio landlord and when you put all that together i wonder if the fact that you were borrowing to fund a development made some lenders cautious and that's why they started looking at things in more detail and asking more questions than they otherwise would it also very much depends on the lender it tends to be the case that your high street lenders are less sophisticated you could probably say or at least less adventurous they tend to be more interested in you and your personal income compared to specialist lenders who are used to lending against the property as the primary asset and tend to have borrowers who are doing slightly more exotic stuff and they've got a better understanding of how it all works and how to underwrite this kind of thing and give themselves confidence beyond this particular situation obviously that's given you concerns about retirement but i'd say in general it's not something that you should extrapolate from and get worried about because many many many people live off their property income during retirement.

5:17Rob D:It's something that lenders are used to. And of course, while you are still expanding at the moment, you might not want to do that forever. So if you hit your number, you get to a level of assets that you're happy with, then you won't be borrowing anymore. Any future growth will reduce your effective loan to value. You could even, although it feels like heresy to say it, start paying down your mortgages to reduce your leverage. So it may be that if you stop and then you don't retire for another 10 years after that, then your loan to value position and your cash position will look very different 10 years on by the time it becomes a factor.

5:45Rob D:So hope that helps. Thank you for your question and good luck. Okay, let's get our next question in from Imran. Hey folks, love your content. I'm a recent listener, just joined the podcast a couple of months ago. I love the content. Thank you for your informative information that you're sharing. Really quick question. Why do landlords tend to choose interest-only mortgages as opposed to repayment mortgages? Because at the end, you're still going to be lumbered with quite a large debt. So I'm just curious to understand it. Is it a cash flow thing or is there some other weird, unique strategy that I'm just not understanding?

6:24Rob D:Look forward to your answer. Thank you so much. Imran, thank you for your question. And you've got close to the answer, at least part of it, in your question, which is one of the reasons you use interest-only mortgages is for improved cash flow. Now that improved cash flow is important, not just to put a return in your pocket, but also to give you a buffer if you did a capital and repayment mortgage so that's paying off the interest plus paying down capital as well one you may struggle to make the required stress tests a lender needs to see so the amount of your cost of your mortgage versus the amount of your rent because your mortgage will be higher it might not mean that you can reach the stress test levels which would mean that you'd have to put more money in so that's part of the reason you might need to put more money in if you do capital repayment to meet the stress test requirements that lenders all have but also with that additional cash flow you can potentially reinvest it and make that money work harder for you again but the buffer that you have as well is really important if the stress test didn't exist and you just did capital repayment and you had small profits every month if a boiler broker has an issue with your roof or any big repair project if you hadn't been building up cash flow reserves, you then may find yourself coming short.

7:45Rob D:So it also gives you that extra protection there. So a combination of capital repayment might require you to put a bigger deposit down, the cash flow that you can utilize to reinvest and build your portfolio on further, or just put it into other investment opportunities, and that buffer are all really important. But I think there's a bigger point here that most people miss, and that is that your debt is being paid down by inflation. When you take interest only, let's say you had a£100 ,000 mortgage and a property worth£150 ,000, that property will outperform inflation. History shows us that over the long term.

8:26Rob D:And depending on what range you take, the average is around about 2 % a year. So you've got an asset that is outperforming inflation, but your debt is being eroded by inflation because the real value of that debt is eroding over time. So£100 ,000 today is not going to be worth£100 ,000 in the future in real terms. And I can give you a real life example of that because while I can't take this forward in time, I can go back in time. And the£100 ,000 mortgage today is the equivalent of£71 ,000 10 years ago. So a change in value of 28.6%. 28 % difference. So inflation has paid down that debt by 28%.

9:19Rob D:So a way of looking at this is inflation has paid down your debt by 28%. You've held the debt at the same level. It's not increased in monetary terms, it's not fallen in monetary terms, but in real terms, when you account for inflation, it's fallen by 28 % over 10 years. So you let inflation do the work for you and devalue the debt while you let inflation benefit you the other way around because it's increasing your asset value and your rent levels as well. That's why property is so magical and most people just miss this point and this is why leverage is key as well when it comes to property investment.

9:57Rob D:You're getting your debt eroded and your assets increased all by inflation. It's magical when you understand it. So Imran, there are lots of reasons why property investors invest with just interest-only mortgages. Most investors don't realise the most important reason which I've just given you but even the first few reasons I did give you are strong enough reasons to go that route anyway whatever you decide though is up to you and i wish you the very best of luck well that's two more questions answered and that's done for this week so thank you for sending your questions in thank you for listening i'll see you back here for the property podcast on thursday bye-bye