Choosing the right buy-to-let mortgage

When you are investing in a rental property you must take out a buy-to-let mortgage rather than a standard residential mortgage. Rosie Beasley, from insurance firm Simply Business, gets the lowdown.

Buy-to-let mortgages differ from the mortgage you have on your home because the lender takes into account the amount of revenue you will be making against the amount of the loan. This means that in many respects it is easier to get a loan for a rental property right now than it is for a residential property, however there are still certain criteria to be met and the equity required will still be higher than in previous years.

Do your research

When a lender is considering your eligibility for a buy-to-let mortgage, the main criteria they use are the loan to value and the rental yield vs. the mortgage payment.

The better the rental yield, the better the mortgage deal you will be able to get. Therefore it is important to pick your property carefully to ensure that you will be able to rent it out. Location is of course very important. You need to buy in an area with either an already strong or up-and-coming rental market, preferably which is close to transport links and amenities.  

It is also advisable to research, which types of rental property are most in demand in an area. New build apartments and houses or period properties? The type of property you buy will determine how many prospective tenants there will be.

You can speak to local lettings agents to get a good idea of the rent you can get for your chosen property. A mortgage lender will generally expect the rent to equal between 115 and 125 per cent of the mortgage payment.

It is easy for a landlord to be tempted to let a property for a higher than average rent, however that road tends to lead to long void periods with no tenants. Keeping rents at the market price will benefit a landlord in the long term, as it makes it easier to find and keep tenants.

What is your deposit worth?

You need to have a deposit in order to get a buy-to-let mortgage. Or if you already own a property and are looking for a re-mortgage, then you will need to have a certain level of equity in the property. Most lenders will offer a maximum loan of 85 per cent of the property value although many these days require an LTV [loan-to-value] more like 75 per cent.

For example, if the property value is £100,000, you will generally need to have a minimum deposit or equity of £15,000 in order to buy it.

Don’t forget to factor in your costs

Many landlords don’t factor in related costs when looking at their budget.  You may think you’ve got a 15 per cent deposit but what will you have left after these costs have come out of it?

Purchase costs:

Stamp Duty
Solicitors Fees
Survey / valuation
Mortgage application and/or arrangement fees

Property costs:

White goods
Decorating costs
Furnishings (for a furnished rental)

Ongoing costs:
Lettings agent fees
Ground rent & service charge (for leased flats & apartments)
Insurance premiums
Income tax

Interest only or repayment?

Most landlords take out interest-only mortgages, as the smaller monthly payments give the best rental yield.

If you take this option you need to think about how you will pay the money back at the end of the mortgage term, assuming you wish to keep the property for that long.  Most lenders will want to see evidence of savings towards the purchase as a level of security.

Even if you plan to sell the property before the end of the mortgage term, these savings could save the day should you experience a long void period or some unexpected expenses so it is worth setting something up.

Most landlords don’t expect to keep their rental property for the full mortgage term so it doesn’t make sense to take a repayment mortgage where you would be paying back mostly interest in the first few years.

Specialist products for multiple properties

Some lenders have specialist buy-to-let mortgages covering portfolios of properties rather than just one property. This may be a good option for landlords who have three or more rental properties.

These types of mortgages may offer the following benefits:
•    The rental income and LTV is averaged across your portfolio, meaning that you can take advantage of any excess rental income to support the purchase of another property.

•    You can have different interest rates on each property but within one single account, making it easier to manage – just one monthly payment and one mortgage statement per month.

•    If you re-mortgage your portfolio with one of these products, you could potentially get a better loan-to-value rate than you would on a single property.

Finding the best buy-to-let mortgage deals

It’s important to shop around for deals on your buy-to-let mortgage. Using a combination of comparison websites and independent financial advisors, you should be able to find a mortgage that suits you.

Mortgages are less freely available than before the recession and so the criteria for products are likely to be much tighter. Have accurate financial details to hand when making applications and read the small print.  Don’t simply take the associated costs at face value – look at them over the term of your mortgage. This way you won’t be tempted into a mortgage product that works out more expensively in the long run.

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