How to enter the buy-to-let mortgage market
By Ben Salisbury
In the current financial climate the dice are stacked in favour of buy-to-let investors.
Research conducted in April 2011 by Santander reveals that it takes a quarter of first-time buyers five years to save for a deposit for their first home. Further research carried out in 2010 by the National Housing Federation found that for people aged 21 in 2010, the average age at which they would be able to afford a new home would be 43 if they didn’t get any help from their parents.
That doesn’t mean everything is plain sailing for buy-to-let investors. Property values in 2010 were static in most regions and most experts believe that prices will fall by between five and ten per cent in 2011. However, in the long term property values will increase so the buy-to-let investor is still likely to make a profit in the end.
What is a buy-to-let-mortgage?
Buy-to-let mortgages are for people who want to buy a property and then let it out to tenants. In most instances the rental income will be used to pay the mortgage on the property. Typically the interest rate charged against the mortgage will be higher for a buy-to-let mortgage than for an owner-occupier mortgage, because a commercial value is attached to a buy-to-let mortgage. Most lenders also ask for a higher deposit, usually 25 per cent.
Increased demand for rental property
Recent research suggests that there are now over one million more people renting than there were in 2005 and that private rented properties now make up one in six homes.
The difficulties in getting a mortgage have increased since the credit crunch as lenders have tightened the screw on borrowers and a deposit of at least ten per cent is required to get your foot on the property ladder.
How a buy-to-let landlord can benefit from the current financial climate
The increased demand for rental property means that landlords can increase the rent they charge. According to research by Paragon Mortgages nearly a third of landlords (32 per cent) have put rents up in the last 12 months. Rental yields have increased in the past four surveys conducted by estate agent, Connells.
Buy-to-let investors, like most people with a mortgage, are benefiting from low interest rates with the base rate at 0.5 per cent for 27 months and counting. In particular if a landlord is on a low variable-rate or tracker mortgage then it is almost certain that they are receiving more in rent than they are paying on their mortgage. This provides the buy-to-let investor with an opportunity to overpay on the mortgage and increase the equity in the property.
Why now is a good time to invest in a property
Connells has also found out that valuations for potential buy-to-let landlords have increased in the first quarter of 2011. This suggests that landlords sense a good opportunity to make a potential profit.
Additionally, the amount of providers of buy-to-let mortgages has increased in the last 18 months. Last year saw a host of new lenders offering buy-to-let products and established players returning to the sector. This has created competition and means there are more competitive products with lower rates and fees out there.
Property prices have not increased by much in the last year and are unlikely to this year. However, the amount of rent that can be charged has.
Read more: The buy-to-let mortgage market rises again
Problems landlords can face
With money tight for many tenants actually getting the rent can be a problem – and according to research by LSL Property Services the problem is worsening. The amount of unpaid rent in February 2011 increased to 12.6 percent of all rent, up from 11 per cent in January.
This can be a serious problem because even if the tenant is not paying rent a landlord has to get a court eviction order to evict a tenant and this can take up to six months – during which time the tenant can live at the property rent-free. If the landlord does not receive the rent then it causes a problem in making repayments on their buy-to-let mortgage.
A further potential problem can involve disputes about deposits. Since 2004, to protect tenants all landlords have to pay the deposit into a deposit protection scheme. At the end of the tenancy either the tenant or the landlord can request repayment of the deposit with any disputes being resolved by a third party.
Status required to obtain a buy-to-let mortgage
If you are entering the buy-to-let mortgage market for the first time many potential lenders will only let you borrow if you have an income above £25,000 a year. Some lenders will also only lend against a property valuation of more than £75,000. If you are self-employed you will need two years worth of approved accounts. Most will also demand a deposit of 25 per cent and a guarantee that the rental income will be 125 per cent of the value of the mortgage payments required against the investment property.
Choosing the right buy-to-let mortgage
It can be tricky to select the right type of buy-to-let mortgage because there is more to consider than when you take out a residential mortgage. With a buy-to-let mortgage as well as coming up with a bigger deposit and proving that you can afford the mortgage repayments the lender will want to analyse your existing buy-to-let property portfolio if you have one and to judge whether the expected rental income is adequate.
The potential investor also has to search harder to find the right type of mortgage as there is less choice on offer. With this in mind it is a good idea to use the services of a specialist broker.
The bottom line in 2011 though is that if you can get a buy-to-let mortgage then now is a great time to take advantage of relatively low property prices, low interest and high demand for rental properties in an environment where the cost of renting is increasing.
Listed below are what I consider to be the best current buy-to-let mortgage deals available.
The top ten current fixed-rate mortgages
| Lender | Type of deal | Rate | Fee | Max LTV |
|---|---|---|---|---|
| The Mortgage Works | 2-year fix | 3.99% | 3.5% | 65% |
| Platform | 2-year fix | 4.09% | 2.5% | 60% |
| The Mortgage Works | 2-year fix | 4.19% | 3.5% | 75% |
| Coventry Building Society | 2-year fix | 4.49% | £1,249 | 60% |
| BM Solutions | 2-year fix | 4.65% | 1.5% | 60% |
| Platform | 2-year fix | 4.69% | 2.5% | 70% |
| The Mortgage Works | 2-year fix | 4.69% | 2.5% | 75% |
| The Mortgage Works | 3-year fix | 4.99% | 3.5% | 75% |
| Nottingham Building Society | 3-year fix | 5.19% | £1,495 | 75% |
| Leeds Building Society | 5-year fix | 5.69% | £1,549 | 60% |
The top five current variable-rate deals
| Lender | Type of deal | Rate | Fee | Max LTV |
|---|---|---|---|---|
| Principality Building Society | 2-year tracker | 3.29% (Base + 2.79% | 2.5% | 60% |
| Paragon Mortgages | 2-year LIBOR linked tracker | 3.30% (LIBOR+ 2.5%) | 2% | 65% |
| The Mortgage Works | 2-year tracker | 3.99% (Base + 3.49%) | 2.5% | 75% |
| Natwest | 2-year tracker | 4.49% (Base + 3.99%) | £1,999 | 75% |
| Nottingham Building Society | 2-year tracker | 4.59% (Base + 4.09%) | £995 | 75% |
buy to let insurance - buy to let insurance uk for landlords from assetsure.com
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