Buy to Let Mortgages
What types of BTL mortgages are there?
Repayment BTL Mortgages
This type of Buy-to-let (BTL) mortgage requires the borrower to pay off the capital sum of the loan as well as the loan interest so that at the end of the period it is fully repaid. This is the safe option as it guarantees that what ever happens, the BTL mortgage will have been paid off by the end of the loan period. Are there any disadvantages of this type of mortgage? There are two basic drawbacks for a landlord. Firstly, from a tax point of view it was only the interest part of the loan that is offset able against rental income. This tax advantage will unfortunately end in 2020 unless you are renting out a Furnished Holiday Let. Secondly, repayments will be higher. This means that it is much easier to sustain a negative cash flow for a landlord with a repayment mortgage. This inability for a landlord to meet loan repayments from rentals means that the size of the loan that lenders are prepared to advance will probably be smaller.
Interest only mortgages
This type of Buy-to-let (BTL) loan requires the borrower to repay only the interest on the loan, in much the same way as you would with the minimum payment on a credit card. The good news used to be for a landlord is that their entire payment is offset able against rental income thereby maximising the reduction of their rental profits and any potential income tax liability. Sadly no longer! However, the ‘downside’ is that it does mean that a landlord has no means of repaying the loan at the end of the BTL mortgage period. Sounds scary – but there are a range of options and specialist advice from Independent Financial Advisers (IFAs) who can advise you on your options in brief they can be summarised as follows:
Do nothing – continue to pay the interest and hope that the real value of the loan reduces because of inflation and the value of your investment rises resulting in every increasing amounts of equity
Set up a ‘repayment vehicle’ which is simple a savings scheme structured in such a way that it aims to repay the loan by the end of the mortgage period. Typical of these were the endowment policies which became almost standard until the early nineties when it was realised that investment returns were not going to be as high as had previously been experienced
There are several different ways interest can be charged on your BTL mortgage:
Fixed Rate BTL Mortgage
A fixed interest Buy-to-let (BTL) mortgage is one where the interest rate is fixed for at a specific rate for a predetermined period of time ranging from 12 months to the full term of the loan term. Typically the period is between 2 and 5 years. The great thing for landlords is certainty – knowing what ever happens to interest rates your payments will always be the same each month. The downside if rates certainly fall you are left paying much more than your fellow landlords on a variable rate – it’s a gamble!
Discounted BTL Mortgage
Discounted rates Buy-to-let (BTL) mortgage, as they suggest offer landlords a reduction in mortgage interest rates for a limited period of time. This discount period is sometimes very useful. For instance it will reduce a landlords negative cash flow where a property is being refurbished and is laying empty. A landlord needs to watch out for high set up costs and that once the discount period ends the mortgage rate is competitive. The other thing is those lock in periods. Some will just be for the period of the discount, but others extend beyond this and can be very expensive to get out of.
Capped rate BTL Mortgage
This type of Buy-to-let (BTL) mortgage really came into being to ‘protect’ house buyers from dramatic rises in interest rates such as those experienced in the early 90’s; just after the U.K. withdrew from the ERM. To me they have had their day as the chances now of dramatic interest rate movements are now highly unlikely.
Trackers (base rate or LIBOR) Buy-to-let (BTL) Mortgage
This type of Buy-to-let (BTL) mortgage is so called because the mortgage rate is linked or tracks the Bank of England base rate. When this changes, so does a landlords mortgage interest rate. A landlord can often get attractive deals with these mortgages as they are a low risk product for lenders as any increase in their borrowing rates can be instantly passed on to their customers.
How is interest charged on a Buy-to-let (BTL) Mortgage?
Interest can be charged by your Buy-to-let (BTL) mortgage company in a number of ways. The majority of the major Buy-to-let (BTL) lenders will calculate interest on a daily basis. They therefore look at the interest rate prevailing on that day and calculate a landlords payments accordingly. Some companies such as Paragon will calculate the interest on a monthly basis. They do this by taking the rate at the beginning of the month and calculate the interest due based on this rate, even if it changes in the meantime.
Some companies such as the Bristol and West and Chelsea still calculate interest payments based on the variable rate at the beginning of the year. The advantage for landlords of having the variable rate effectively fixed for a year is that it gives them greater warning with which to adjust their finances when rates change. The disadvantages are that if rates fall, then savings will not be passed on immediately.
In looking at the interest rate, it is as well for landlords to be aware of the significance of the APR (Annual Percentage Rate) in assessing the ultimate cost of their loan. The APR is the cost of a landlords borrowing and includes the interest payments, mortgage insurance and the originators fee; all expressed as an annual percentage. This is the true cost of the loan as apposed to the headline rate, which excludes fees and insurance and just reflects the interest being paid.
BTL Mortgage Deposit
What size mortgage deposit do I need to buy a buy-to-let property? The short and straight answer is that this depends. It will depend on the type of BTL property you are looking to purchase and also your financial circumstances and what other lending and assets you have. In general the better your circumstances the higher the LTV lenders will advance and the smaller the deposit they require. It also depends strangely on the state of the economy. When lenders are confident about the economy they are more happy to lend out higher amounts of debt. So in the good times BTL lenders might advance you up to 85% LTV whilst in the bad times like the credit crunch and post Covid this might come down to nearer 75% maximum.
How can a landlord find the best BTL mortgage deals?
The Internet has made tracking down the best products with which to buy or remortgage an existing property. Despite this choice, a landlord may feel more comfortable just using your existing bank, because they have used them before. I’m sure that they will be very helpful, but this is business. Will they offer the best deal? Make sure they are at least competitive before you commit to using their products.
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The other alternative is for a landlord to source a loan through a mortgage broker. Brokers act on your behalf to find the best deals in the market place. They do this by having access to most lenders products through an online database. Using these databases they can pick the ‘hottest’ deals matching your requirements. For this service expect to pay a fee of between a £200-£500+, payable only if and when the mortgage is approved.
You may ask, why use a broker at all when you can find so much of this information over the Internet for free? There are a couple of reasons. First of all, time. As long as you are specific with your selection criteria and your circumstances; a good broker should be able to come up fairly quickly with a number of suitable products. This can save a landlord a considerable amount of work by not having to check through all the mortgage products, their interest rates, conditions and limitations. Secondly, where a landlords financial circumstances are straight forward it should be fairly easy for you to find a suitable mortgage. However, when a landlords circumstances are more complex the time taken to source the right mortgage can be considerable. In this situation brokers can easily earn their money by sourcing lenders that fit a landlords specific requirements.
Finally not all property investors are aware that by using a broker they can access preferential rates and deals not available through the general market. Therefore it’s always worth checking with a mortgage broker first to see what they have all this will cost you nothing. Have a look at some of the most respected and well used buy-to-let mortgage brokers operating in the UK market today. Please let us know what you think so that we only recommend the best products.
The other benefit of using a mortgage broker is that they take care of most of the work involved in a mortgage application freeing a landlord up to do more important things!
BTL mortgage provider lending criteria
Mortgage providers have broadly two approaches when it comes lending to landlords. The first maintains that any investment property should be assessed on the basis it is a self financing investment. The other approach which predominated prior to the arrival of the ‘buy-to-let’ initiative in the late 90’s, measures affordability in terms of the landlord applicants overall income and their financial commitments. The details of each approach are laid out below:
1. The majority of lenders now lend to landlords on the basis that the investment property is self supporting in that rent generated will pay for the mortgage and other related expenses. They therefore insist that the rent covers a minimum of 125-130% of the expected mortgage payment. One thing for landlords to watch out for is what companies stipulate as the interest rate to be used to calculate the projected mortgage payment. Some lenders use an interest rate reflecting the long-term average; others use the current standard variable rate. Some companies are prepared to use a mortgage calculation based on interest only costs if that’s the type of mortgage you are applying for. Others automatically assume a repayment mortgage, which makes obtaining the maximum of 85% Loan To Value (LTV) more difficult..
2. The other approach used by mortgage companies uses a landlords personal income as a basis of affordability. The mortgage company takes the landlords salary or income after outgoings to access a borrower’s ability to repay the debt. This is a more cautious lending policy most suitable for high income individuals or older buyers who may be close to or have paid off their existing mortgage. This type of lending criteria also limits the number of properties that can be bought and therefore this type of provider is not suitable for those landlords who want to build a portfolio of properties.
Potential stumbling blocks of a landlords BTL mortgage application
Like any process things don’t always proceed smoothly for landlords. So what kind of things could go wrong? One of the potential problems is that a landlords credit score fails to come up to the mark. For most landlords this shouldn’t be an issue. Only if a landlord has or had existing debt problems should they struggle on this. If a landlord fails to obtain a mortgage on their own, this is when engaging the services of a mortgage broker could be helpful in obtaining a loan.
Another potential problem for landlords is the recommendations contained within the mortgage surveyor’s report. This report could pick up on a number of issues that potentially impact on the chances of the landlord been offered a loan:
1. Firstly, the surveyor may identify essential repairs to the building. The surveyor could insist that a retention is placed on the loan paid to you so that you don’t get the full amount until the work is carried out.
2. The surveyor may value the property at less than the agreed purchase price. In both scenario 1 & 2, low valuations can present an opportunity to an entrepreneurial purchaser to go back to the vendor and negotiate a lower price.
3. The third scenario where the mortgage surveyors report can impact on the mortgage advance is; when they disagree with the projected rental assessment for the property. This situation is particularly likely where you are purchasing a property that needs extensive cosmetic refurbishment and redecoration. In this situation you could consider using a special refurbishment mortgage such as the one offered by Paragon Mortgages The power of the remortgage for landlords Most landlords only think of taking out a mortgage when they buy a new property. But what about remortgaging? This is something I have done regularly over the years. As properties have increased in value I have regularly taken equity out. This process has allowed me to free up capital and either purchase additional properties or have a good holiday! More seriously it’s always good to keep checking the market to make sure you are still getting a good deal.
What are the costs? These should be much less than an initial loan as there is no stamp duty to pay and also because there are no vendors to deal with. Legal fees are also less at approximately two thirds of those for an initial purchase. It’s now possible to do the entire process online, for a lot less money than a traditional solicitor.
A landlords tips on BTL mortgages
- Keep an eye on the BTL mortgage market for new deals and products that might be suitable for your needs
- Review your redemption penalties – it might be cheaper to pay them in order to get out of an uncompetitive deal
- Maintain as much flexibility in your financing arrangements – don’t fix your rate unless you are very certain that it is good value or you will not need to extricate yourself from the agreement early
- Read the small print. Make sure you understand any redemption penalties before you sign
- Remember the tax implications of a mortgage – only the interest is offset able against rental income
- Only use equity release for larger sums of money that are required for the long-term. For shorter periods and small sums, consider using an unsecured personal loan
- Check out the special deals offered by the big mortgage brokers before dismissing using their services. You could save thousands over the period of the deal, easily paying for their brokers fees
- If you see a good deal, ‘go for it’. Many of the best mortgage deals are non standard products with limited funds allocated to them. If you don’t sign up quickly they are likely to be fully subscribed for very quickly.
Tel: 029 2069 5446
Your home may be repossessed if you do not keep up repayments on your mortgages.
The Financial Services Authority does not regulate some forms of mortgage.
More useful stuff on getting a landlord mortgage: