Low returns on savings accounts and a volatile stock market have boosted the attractions of buy-to-let property as an investment option.
Landlords in many parts of the country are also enjoying increasing demand from tenants, who are struggling to afford a deposit on their first home and remaining in the rented sector.
Competitive mortgage rates add an extra shine to the buy-to-let proposition.
We have an extensive knowledge of the limited company buy to let market. If you are thinking of buying a property to let, the mortgage is one of the most important considerations. You cannot take out a standard residential loan, but many banks and building societies offer buy-to-let mortgages, specifically for landlords.
A buy-to-let mortgage is similar in many ways to a standard home loan. However, there are some important differences. For a start, the interest rate is normally higher. You will also have to put down a bigger deposit on a buy-to-let property – a minimum of 25% is the norm, although many of the best deals demand 40% or more.
Buy to let mortgage rates vary, and similarly to any other type of mortgage, are dependent on the risk of the mortgage to the lender as well as the deposit available for an individual to put down. Buy to let mortgages are often greater than residential rates.
Then there’s the affordability calculation. Banks and building societies assess your personal income when they are working out how much you can borrow on a residential mortgage. With a buy-to-let loan, they look at the expected rental income, however, most lenders insist that the annual rental income must equal up to 145% of the annual mortgage interest payments often using a sensitized rate. Your rate of income tax paid also affects how much you can borrow, as does the number of properties you own. As a result, it has become more difficult to find the right lender, this is where our impartial “whole of market” approach and many years experience can make sure you find the most appropriate product. The strict conditions reflect the greater risk of buy-to-let loans, as the statistics show that borrowers are more likely to default on a buy-to-let than a residential mortgage.
The required rental income buffer on top of the mortgage interest due is also there to allow for a period of vacancy between tenants.
There is usually a list of other eligibility criteria. Most banks and building societies insist on a minimum age, often 25, plus a minimum income, usually around £25,000. Most lenders operate a limit on the number of buy-to-let loans you can have and there will be a cap on the total amount you can borrow, though it could be £2 million or more.
To help you choose the most suitable buy-to-let mortgage, it is useful to gain insight into how much a mortgage would cost should you keep it for the full duration of the deal. APRC (Annual Percentage Rate of Charge) gives you this view, taking account of:
You can usually choose between a range of mortgage deals, including fixed rate and tracker loans. Arrangement fees also apply – and they can be high, typically more than £1000. Many landlords prefer a fixed-rate mortgage so that they can budget with more certainty. But tracker loans are often cheaper, if you are happy to cope with fluctuations in the cost of your mortgage.
Most buy-to-let loans are interest only, not repayment. In other words, you pay only the interest each month and clear the capital debt when the property is sold. There are several advantages to an interest-only loan if you are buying a property to let. First, the monthly payments are cheaper than a repayment mortgage. Plus, you can usually offset a percentage of the mortgage interest against your tax bill. Speak to your tax adviser about this.
Of course, the downside is the lack of capital repayments to reduce your outstanding debt. This can be especially tricky if house prices are flat or falling as it raises the possibility that you won’t generate enough to clear the mortgage from the proceeds of the sale.
Do your sums
There are risks involved with buy-to-let investments. You have to be confident that you can cope if your property is void for any period, or if your tenants prove to be unreliable. You also have to make sure the sums add up, bearing in mind that both rents and house prices could come down.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
There may be a fee for mortgage advice. The precise amount will depend on your circumstances and will be agreed with you before proceeding but we estimate this to be between £599 & £799
