Becoming a landlord is still a wise investment but getting a buy to let mortgage has become a little more difficult since the credit crunch. The good news is that deals do still exist – you just need to know where to look and how to fit with the lenders ever more stringent criteria. So if you are looking to get a buy to let mortgage this blog should help you on your way but don’t forget to get in touch if you want help.
Buy to let mortgages; a brief history!
One thing is for sure buy to let is big business in Britain today. Over a million people of us own a property that we rent out. The 10 years from 1997 to 2007 with easy finance and soaring house prices made becoming a landlord even more attractive.
The traditional requirement for a 25% deposit and rent to mortgage interest cover of at least 125% was replaced as the boom grew and rising demand saw lenders becoming ever more relaxed. They asked for smaller deposits, 100% rent to interest cover and even went as far as basing borrowing on personal income!
Previously interest rates on buy to lets were set higher but as the demand peeked this levelled out to match residential loans.
But then the credit crunch of 2007 hit and buy to let mortgages suddenly became much harder to acquire. The decline was dramatic with research showing availability of buy to let mortgages declining by 95% from 2007 to 2009! Since then the market has recovered somewhat but hasn’t yet hit the heady days of the early noughties!
The buy to let market is still there and so are the mortgage deals if you know where to look! House prices also dictate that there are still opportunities for investment and the rental market still remains buoyant.
How do buy to let mortgages work?
The main difference between a residential mortgage and a buy to let is that the lender calculates affordability by taking into account the rental that will be earned as the main source of income. (Occasionally the lender will look at the landlord’s personal income too.)
At present lenders want to see prospective rental income, independently verified, of 125% of the monthly interest payment on the mortgage.
They insist on the 125% to ensure the landlords has cover for when their property may not be rented out and build a cushion of comfort for the lender that the borrower will not default.
It’s now not unusual for lenders to want to see larger deposits with many asking for at least a 25% deposit. However, the best buy to let mortgage deals are to be found where the loan to value is down at 60% or lower.
A word of caution for any potential borrower is that the amount of the mortgage you have on your residential property can affect the loan capacity for a buy to let especially if you are planning on using personal income as a way to close the deal.
Buy to let mortgage lending criteria
Most lenders have a range of borrowing from £25,001 to £1m and you may also find a cap on the number of buy to let properties you can own.
The main rule is the rent to mortgage rule – the 125% thing!
Borrowers must meet this rule and also stump up the necessary deposit for the deal selected.
Remember the minimum deposit you will need to find is generally 25% but deals become more competitive when you can put down a 40% deposit or more (there are some deals out there which only require 20% and even 15% deposits so deals are always changing). Also, many lenders criteria, such as rental income to interest, may become further relaxed the higher the deposit becomes.
The Financial Services Authority (2018 update; now called the FCA) does not, at present, regulate the buy to let market (2018 update; that’s changed too! Now we have regulated and unregulated buy to lets!) so lenders can advertise and promote their products very differently to how they do in the residential market – so be wary of their ‘fabulous’ offers!. This also means that interest only buy to let mortgages are commonplace.
2018 Update: Lending criteria and rules change…never assume anything stays the same.
Buy to let mortgage costs
When buy to let mortgages were introduced they were considerably more expensive than those of their residential counterparts. As the market boomed buy to let mortgages fall in line with ordinary home loans. From 2007 to 2009 this has changed and borrowers could expect to pay around 2% to 3% above the cost of residential mortgage interest rates. Now again the buy to let mortgage interest rates are dropping towards residential levels again but with much more stringent lending criteria.
Another thing to be aware of is that buy to let mortgages often attract large arrangement fees. A good fixed rate deal is likely to have a 2.5% of loan fee, ie £2,500 on a £100,000 mortgage, while those with higher interest rates will charge less.
It may be worth checking that any high fee being paid is worth it, sometimes the fees are so costly that a higher interest rate would be a better option.
Buy to let tax breaks
Buy to let mortgages do not offer any direct tax breaks. However, it is possible to offset the interest payments on the mortgage against the tax on the rental income as well as other expenses such as maintenance and agents fees. This is why many landlords opt for interest-only mortgages and use excess rental income to reduce the capital balance of the mortgage once or twice a year – therefore lookout for a mortgage that will allow you to make capital repayments without penalty.
One other thing to factor in is capital gains tax. Should you come to sell a buy to let property and generate profit in excess of £10,600 per annum you must pay tax at a rate of 18% if you earn less than £41,450 and 28% if you earn over £41,451.
(April 2018 update…lots has changed in the market and the tax rules plus much more has got tougher).
My final thoughts on the buy to let mortgage world!
Getting a buy-to-let mortgage is all about having a decent-sized deposit and being able to prove the viability of the rental income (and having this independently verified). Then it’s simply a case of looking for the best deal in the market.
To find the best deal you need to be able to access all the providers and all the products.
You could do this on the net and then spend hours and hours making comparisons or choose to work with an independent mortgage broker. They will do the hunting for you and help you to secure the best deal available to meet your personal situation. They often can access products that are not available to the public direct and this is because lenders are increasingly working closer and closer with the mortgage brokers.
Update on the buy to let mortgage market (Aug 2018):
Since I originally wrote this blog back in 2013, there have been major significant changes to the buy to let mortgage market, which is having a drastic impact on the market. This predominantly affects portfolio landlords and the tax breaks have changed significantly. Be sure to read my latest buy-to-let blogs by following this link or find me on YouTube to keep up to date with my latest insights!
Like all things, the market is not static, so be sure to keep on top of it.