One of the most important considerations when investing in buy-to-let property is finding the right mortgage deal.
Mortgages for buy-to-let properties work differently to standard home loans because banks and building societies take into account your expected rental income. Interest rates and fees are normally higher and you will usually need to provide a larger deposit for a buy-to-let property.
Here's our checklist of 10 things to consider when choosing a buy-to-let mortgage:
1. What deposit will you need?
Buy-to-let mortgages have a 'Loan to Value' (LTV) rate, which is the amount of borrowing available compared to the value of the property. This usually varies between 60-75% which means you'll need a deposit of between 25-40%. Much like a residential mortgage, the higher the deposit, the better the interest rate in most cases.
2. Fixed, tracker or variable - which is best?
It is usually best to opt for a fixed rate or tracker mortgage. Many buy-to-let landlords prefer the stability of a fixed rate mortgage so outgoings are steady and predictable for a longer period of time. In comparison, tracker mortgages fluctuate with the Bank of England (BoE) base rate of interest and can also offer the lowest starting rates on the market. But while a fall in interest rates is guaranteed to be passed on to you, so is a rise in interest rates, so you'll need to be prepared for potentially higher payments. The difference with a standard variable rate mortgage is that it's set at the standard interest rate that the lender has set and doesn't necessarily pass on any rise or fall in the BoE base rate. In all cases, you should seek advice from a broker or lender on what's best for you, as individual circumstances are unique.
3. What interest rates will you need to pay?
Buy-to-let mortgages have become more affordable recently as lenders lower interest rates to keep the market moving. The rates offered will depend on the type of mortgage you choose but typically fixed rates over two or three years are around 2-3%, while tracker mortgage rates can start at below 2%.
4. Should you choose an interest-only or repayment mortgage?
Most buy-to-let mortgages are based on interest-only loan payments. The idea is that the value of the property will be more than enough to pay back the borrowing at the end of the mortgage term. But if the market falls you will be at risk of having a shortfall to repay. Interest-only mortgage payments are often considerably lower than those for repayment loans and finance costs are currently tax deductible as a business operating expense.
5. How much will be charged in fees?
Arrangement fees can run into thousands of pounds for the best buy-to-let mortgage deals. Make sure you include these fees in your calculations when deciding which mortgage offers the best value.
6. Are there any other criteria for getting a buy-to-let mortgage?
In order to secure a buy-to-let mortgage you will usually need to be:
- at least 25 years old
- employed with a salary of £25k+
- a homeowner with a mortgage or a property you own
How many properties you have in your portfolio can have an impact on the type of mortgage products available to you and there may also be limits on the number of buy-to-let mortgages you can have and the total value they represent.
7. How do lenders calculate 'affordability'?
Unlike homeowner mortgages that look at salary and expenditure, buy-to-let mortgages calculate affordability based on potential rental income. To be 'affordable' you will need to show that you can collect rent amounting to at least 125% of your annual mortgage interest payments calculated at a stress rate of around 5.5% (this varies from lender to lender). The 25% buffer is essential to allow for tenant void periods and to mitigate against the higher risk buy-to-let mortgages represent for lenders. However, with increasing regulation being imposed on landlords, some lenders have started to require rental cover of 145%.
8. What other expenses should you keep in mind?
To make sure your buy-to-let investment will be profitable you need to factor in all your expenses. This is everything from Stamp Duty and other purchase costs to renovation, maintenance, letting agent fees, service charges, ground rent, insurance and bills (if applicable) to name just a few. And don't forget to factor in potential tenant void periods! This is why it's important to try and get the best mortgage rate available, as it's often the single biggest cost for a landlord.
9. Are there different types of mortgages for different types of buy-to-let properties?
Take HMOs (Houses in Multiple Occupation) for example. Many lenders don't offer mortgages for this type of property because there are often higher costs in preparing an HMO property for rental, and lenders perceive multiple occupancy to be more risky. The value of the property in the event of non-payment and repossession can also be lower if it has been converted into an HMO. Although you will have less choice, there are growing numbers of lenders offering loans to landlords investing in HMOs and student lets. Typically, you will need to provide a deposit of at least 25% and interest rates may be higher than those offered for standard buy-to-let mortgages.
10. Should you use a mortgage broker or go direct to the lender?
Using an independent broker to find the buy-to-let mortgage that's most suitable for you can be very helpful. There are so many products on the market it's really important to do your research to find the most competitive deals on offer and weigh up the pros and cons of the available options.
