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Things for landlords to watch out for when getting a BTL mortgage

Things for landlords to watch out for
Obtaining a buy-to-let mortgage can potentially be full of pitfalls for landlords, especially for novice landlords. This is why Property Hawk has spent so much time and effort putting together the  {{ LINK MortgageAdvice.aspx BTL mortgage advice }} and information.

Buy-to-let finance isn’t cheap

Firstly, landlords should understand that buy-to-let finance is not cheap.  Since the ‘credit crunch’ of 2007,  it has got more expensive for landlords.  In an ideal world landlords should avoid borrowing somebody elses’ money altogether.  This way a landlord doesn't incurr, interest payments (mortgage lenders make money on the rate of interest they charge and how much it costs them to secure the funds), product application fees, mortgage brokers fees, redemption fees, mortgage administration costs, survey fees.  All these mortgage costs can be avoided if a landlord uses their own funds. 

Landlords should focus on the APR

However, for most landlords this is not a realistic option; particularly when they are setting out on their buy-to-let journey and building up their residential investment portfolio.  If a landlord does need to borrow funds their aim should be to minimise their long-term finance costs.

Landlords should therefore avoid eye catching headline BTL mortgage rates.  These low mortgage rates will probably come with high product fees and last for only 2-3 years. A landlord will then be forced to shell out a whole load of fees and costs a few years down the line in order to re-mortgage.

The measure a landlord should use for comparing different BTL mortgage products is the APR (Average Percentage Rate).  An APR is the true cost of the BTL loan worked out over its' entire term.  This annualised rate reflects the true rate of interest any landlord & buy-to-let borrower will have to pay and includes any fees or charges incurred in setting up the loan as well as the rate of the buy-to-let loan once any initial discount or special term have ended. 

Landlords wanting to search through buy-to-let loans with the lowest APR’s can use our independent search facility

Avoid paying the standard variable rate (SVR)

One reason that many landlords need to remortgage is to replace an existing buy-to-let loan at the expiry of an existing fixed period.

This is because a BTL mortgage product where the initial period has finished will generally revert to a mortgage lenders standard variable rate.  This will be considerably above the initial rate and will generally be uncompetitive in the BTL mortgage market place.  A landlord in this situation should always approach their BTL mortgage lender directly to see whether it is possible to be put onto a more competitive buy-to-let mortgage rate.  If they are still not satisfied by the rate offered by their existing BTL mortgage lender then they should look at alternative buy-to-let lenders.

Using a BTL mortgage broker

If a landlord is thinking of using a buy-to-let mortgage broker, they should establish certain things about them before engaging the mortgage broker to find a buy-to-let mortgage product for them.

The guidelines set by the Financial Services Authority (FSA) stipulate that an adviser must confirm to you upfront the basis of advice based on one of the following desriptions:

1) We offer Mortgages from the whole of the market
2) We only offer Mortgages from a limited number of lenders.
3) We only offer Mortgages from a single lender or a single company

It would not be unreasonable for a landlord to assume that an adviser offering 'option 1' would be an independent adviser offering you access to all the mortgage lenders, however, the Financial Services Authority (FSA) require advisers offering option 1 to have a mortgage lender panel that is ‘representative’ of the whole of the market.  This means that despite there being over 200 lenders they could be offering you a choice of maybe just 10 of these!

The implication of this for a landlord is that your mortgage broker may place you with the best lender they have on their panel but this may not be the most competitive or best suit a landlord’s needs.  Therefore a landlord should always ask their prospective broker how many lenders they have on their panel, a minimum of 20 should give a landlord a range of 50-100 buy-to-let mortgage products.  The more mortgae lenders a mortgage broker has, the more products that a landlord will obviously have to choose from. 

The other thing about buy-to-let mortgage brokers and the buy-to-let industry is the importance of procuration fees.  These are fees paid by the BTL mortgage lender to the buy-to-let mortgage broker for selling their products.  It’s blindingly obvious to any business orientated individual that the BTL mortgage brokers will tend to align themselves with the BTL mortgage lenders that pay the best procuration fees.  A landlord should be aware of this if they choose to use a BTL mortgage broker and also when choosing which one to ultimately use.

Regulations on sale of BTL mortgages
What is perhaps more shocking to landlords is that most Buy to Let mortgages are not regulated by the Financial Services Authority (FSA). The FSA was established by the Government to protect the interests of consumers and it now regulates a whole host of financial products from pensions to residential mortgages.  Buy-to-let mortgages are not regulated by the Financial Services Authority (FSA) because they are classed as a commercial product.  The assumption by the authorities is that individuals operating in this sector are ‘commercially aware’ and do not need the same level of protection.  This means that someone without qualifications or experience could set themselves up as a BTL mortgage adviser.

Although buy-to-let mortgages are not regulated by the Financial Services Authority, they are still covered by the Financial Ombudsman Service (FOS).  This means that by going through a broker and receiving advice, a landlord has a degree of protection against taking the wrong product or bad deal, as opposed to none {{ LINK MortgageAdvice.aspx?Id=169 if a landlord decides to go it alone. }}

Complaints against brokers are independently reviewed by the FOS, using the principles of Treating Customers Fairly, which cover such things as the way that a deal was marketed to a landlord, whether a landlord received sufficient information to make an informed decision, whether a landlord was aware of all the costs involved in the transaction and so on.

Many BTL brokers are registered with the Financial Services Authority (FSA) because they sell other products that require registration.  Therefore, we would always advise landlords to check with a mortgage broker first that they are regulated.  Whilst this in it self will not protect a landlord when buying a buy-to-let mortgage, it does indicate that the broking company is probably not a bunch of cowboys & that they are more likely to be a responsible organisation.

There is a trade body called the National Association of Commercial Finance Brokers NACFB which some mortgage brokers belong to.  Membership is voluntary and it sets out guidelines for its members to operate within.  However, they have no direct powers to act in the consumer’s interest against anybody that breaks this code.

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