As property investors, we are used to having our own methods for assessing the viability of an investment. There are several metrics commonly used, either singularly or in tandem: gross yield/net yield, yield on debt, and so on. In this article, we take a slightly different tack and look at how mortgage lenders view an investment when they conduct their due diligence with a view to lending. It is important to consider this because, as an investor, the better you can align with your lender, use their language, and satisfy their requirements, the more likely they are to lend to you.
When it comes to assessing the viability of a property investment, the ‘yield,’ ‘rental yield,’ or ‘gross yield’ is often the initial go-to metric that novice investors and the media tend to focus on. Certainly, it is a good starting point, but yield in itself gives little information about the underlying profitability of an investment and, by all accounts, is not something that lenders themselves will focus on unduly.
Leading lenders such as Paragon have recently released detailed information on how they assess the viability of an investment for lending purposes. These insights may surprise many novice investors.
According to their report, Paragon initially pays close attention to the yield performance of each proposed investment property but also considers the overall performance of the landlord themselves, including their property portfolio. However, unless the landlord is buying the property outright with cash, yield alone only tells part of the story needed for a lender’s decision. Paragon also considers other crucial metrics when assessing an investment opportunity.
The reason for this is that yield doesn’t account for many factors, such as whether the landlord has borrowing against the property or their portfolio, the loan-to-value (LTV) ratio, or the rate of that finance. It doesn’t consider costs such as upgrades, Stamp Duty, legal fees, or ongoing maintenance costs. Nor does it factor in capital appreciation potential.
Why Landlords in Kent Should Think Beyond Yield
For more experienced landlords, metrics such as Return on Investment (ROI) and Return on Capital Invested (ROCI) are more telling. These metrics are particularly relevant when purchasing property with a mortgage or private funding, leveraging cash or deposits for a higher return. As Paragon points out, the ROI can be significantly higher than the gross yield, especially when considering acquisition costs and ongoing expenses.
In addition to yield and ROI, lenders also evaluate the Income Cover Ratio (ICR) and LTV. These figures reflect a lender’s cautious yet informed approach. Paragon’s own data suggests that landlords who align their investment strategies with these metrics tend to secure better lending terms.
The Bottom Line for Kent Landlords
Paragon’s latest research highlights that 87% of landlords are profitable, with 9% breaking even. While rising mortgage rates may affect some investors, the property sector in Kent and beyond continues to deliver robust returns for portfolio landlords and property investors.
If you’re a landlord or investor in Kent looking to grow your portfolio, taking a strategic approach that incorporates these lender-focused metrics can make all the difference. Don’t just chase yield—consider the bigger picture of ROI, ICR, and LTV to secure both lending and profitability.
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