By Marc Da-Silva
Buy-to-let mortgages were introduced in 1993. They tend to be slightly more expensive than ordinary home loans, and there are around 40 buy-to-let lenders, offering hundreds of different products.
So if you're an amateur investor looking for finance, where do you turn? Here are the key points you need to know when taking out a buy-to-let mortgage.
The types of property banks/building societies may lend on
Most mortgage lenders prefer to lend on residential properties that are worth over £40,000. Many lenders will not lend money on ex-local authority properties, flats that are situated above shops, or properties that require a Houses of Multiple Occupation (HMO) licence.
This is not to say that mortgages cannot be attained for such properties. But because there are fewer lenders willing to lend on these types of properties, the borrowing rates available are not quite so competitive.
Buy-to-let borrowing options
Fixed rate
If you want to know exactly what your monthly repayments will be, then a fixed rate mortgage for typical term of two to five years would be ideal.
Tracker mortgage rate
A tracker mortgage rate moves in-line with the Bank of England (BoE) base rate. So the finance borrowing rate increases if the bank base rate rises, and decreases if the base rate drops. The minimum interest rate on a tracker mortgage is 3%.
You also have the option of selecting how you wish to repay your mortgage.
Repayment - you repay the capital borrowed plus interest, which means higher repayments but the loan is repaid sooner.
Interest-only - you repay just the interest, usually until the end of the loan term. Your monthly repayments are lower, but you will eventually have to repay the capital. This method is popular among investors but you must ensure you can pay the outstanding debt at the end of the term!
Interest Rates
If interest rates are falling, then a variable or tracker rate may be the best option. However, if interest rates are likely to rise, then a fixed-rate mortgage may be better.
Because inflation in the UK recently increased to 3.1%, the Bank of England may now be prompted to raise rates to 5.5% on 10th May. This will be quickly reflected in higher mortgage lending, so a short-term, fixed-rate mortgage could be the best option at this stage.
A record 87% of first-time buyers chose a fixed-rate mortgage in February 2007, according to the Council of Mortgage Lenders (CML).
Michael Coogan, director general of the CML, commented: “With the chance of at least one more interest rate rise this year, first-time buyers are taking the sensible option of taking out fixed-rate deals, and locking into the payment security they provide.”
Typical lending criteria and borrowing rules
The most significant feature of a buy-to-let mortgage is that your existing income does not necessarily have to be factored in to the initial mortgage assessment. Instead, the lender instructs a valuation of the property, which includes a valuation of anticipated rental income. However, some lenders will lend on a multiple of your salary, plus the rental income.
How much you can borrow depends on the lender, but the maximum typically ranges from £150,000 to £1m per property. Generally, buy-to-let lenders will look for 125% of the mortgage repayments in rent, although some are relaxing this stipulation. The lower the rental cover, the higher the rate of borrowing is likely to be.
Most lenders also look for a minimum 15% deposit. However, deals become more competitive if you can put down a higher deposit.
Size of a typical deposit
The average buy-to-let investor borrows 73% loan-to-value (LTV), according to the Association of Residential Letting Agents (ARLA). Consequently, the average deposit paid by investors is 27% of the property price.
The average UK residential property currently costs around £195,000, according to the Halifax. Therefore, at 27%, the average investor is currently paying a cash deposit of approximately £52,650. However, remember that a minimum deposit of just 15% is required, reducing the financial amount.
Details a lender will need to know
Lenders will ask questions relating to your employment history and credit commitments. They will also want to know whom you intend to let the property to.
A lender’s main concern is that you are able to repay the mortgage and that the property is worth enough money to cover the amount borrowed. In order to ensure that the value of the property is not overestimated, a lender will appoint a surveyor to provide a precise valuation. In the case of buy-to-let, a surveyor will also assess the rental income achievable.
Legal and survey costs
The cost of getting a survey done varies. They can sometimes be free, as part of a mortgage package, while a full structural survey can cost over £1,000.
A solicitor is responsible for taking care of all the legal aspects of buying a property and generally charge for local searches, land charge search, land registry and stamp duty. The total bill for all of these fees can run to several thousand pounds.
Protecting yourself
You should protect yourself by taking out mortgage payment protection insurance, in order to cover your mortgage balance, in the event that you should become too sick to work, lose your job or die.
The cost of such insurance can typically start from £3 per month.
Remember, your property may be repossessed if you do not keep up repayments on your mortgage, so ensure you have access to emergency funds and a solid contingency plan, otherwise known as an exit strategy.
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