The buy-to let industry is booming as a growing number of Brits are delaying home ownership because they can’t afford to raise the deposit and are renting instead. This means that the demand for rent has soared in many areas, along with rental rates, leaving landlords to reap the benefits. Here’s how you get a mortgage if you want to invest in a buy-to-let.
- Property investment and the buy-to-let mortgage situation
- Buy-to-let mortgage brokers
- Buy-to-let mortgages
- Interest-only buy-to-let mortgages
- Repayment buy-to-let mortgages
- Offset buy-to-let mortgages
- Long-term contract mortgages
- Mortgage rates for buy-to-let properties
The latest figures from the Council of Mortgage Lenders (CML) show that buy-to-let lending has accounted for 12.4% of total gross mortgage lending so far in 2013. This is up from 11.5% in 2012 showing that the sector is still in high demand.
Also, according to HomeLet the average cost of renting a home in the UK increased by 3% during August to £851 per month. This is bad news for renters but good news for landlords.
The other good news for landlords is that buy-to-let mortgages are at really good rates right now. David Hollingworth, Director of London & Country Mortgage brokers says:
“Buy-to-let landlords will find there is a competitive range of mortgage deals available. They will find similar choice of deals including short to longer-term fixed rates and tracker rates, much the same as on your own home.
Buy-to-let mortgages will typically demand a bigger deposit, usually at least 25% or even 40% in many cases. However, recently lenders have been offering 80–85% LTV (loan to value, the percentage of the purchase price) which would mean you would only have to stump up 15–20% as a deposit. The fees can be bigger too with some charging as much as 3.5% of the total loan as a fee (!) although others can come with less extreme fees.
“The level of borrowing will be based primarily on the expected rental income” says David Hollingworth, “with most lenders expecting it to cover the mortgage interest by 125% – in other words, the rent you receive should be at least a quarter higher than the mortgage payments. But it’s just as important to focus on the property and make sure that it will be attractive to the target rental market.”
As a prospective landlord, a good mortgage broker is invaluable. But you can (and should) research the options yourself so you can make an informed decision. It’s worth shopping around for a good broker and comparing their services and prices.
Use our good mortgage broker and see what offers they can find for you. They’re an award-winning firm so you can rely on their work.
You have a few decisions to make when it comes to mortgages with the main ones being what type of mortgage to get, what kind of rate you want and, of course, what kind of mortgage you can afford.
There are three main types of mortgage:
Interest-only mortgages have traditionally been the most popular with landlords as you can only put the interest part of your mortgage repayments against tax. It makes sense to keep the interest high just to keep down the tax!
Interest-only mortgages have become a lot harder to get for your own home in recent years but they’re still freely available for buy-to-let landlords and are the most popular option.
Interest-only mortgages are typically cheaper to repay as you’re only paying back the interest on the loan, not the actual mortgage itself. It does mean that you won’t own the property when you finish the mortgage but if you’re planning on selling on then that’s not a problem.
Otherwise, consider investing in a back-up product such as a stock market fund to grow money separately in order to pay off the mortgage at the end of the term. Some people use endowment funds to do this but we don’t like these at Moneymagpie. They tend to be poor performers and charge too much in management fees.
Interest-only mortgages, are a bit of a risk as you’ll need to be sure you can pay off the actual mortgage. You could take a massive gamble and hope that as house prices rise, this will leave you with enough to pay off your mortgage. The UK housing market is only starting to show signs of life again after years of slow recovery.
With the Bank of England base rate at an all-time low of 0.5% for four years now, homeowners who do have tracker or interest-only mortgages are paying significantly less interest than they would have done before the financial crash. However the rate is expected to rise in the next two to three years.
If you need some of the rent to live on then an interest-only mortgage is good because there should be some rent left over for your own pocket after you’ve made the interest payments.
If an interest-only mortgage seems like a bit of a gamble, a repayment mortgage could be the one for you. One of the great things about this type of mortgage is that once you pay it off the property is yours so it’s more secure.
However, the monthly mortgage repayments are likely to be much more than interest-only ones, leaving you with little to spend on the property or other essentials, which is why it is imperative you work out what kind of mortgage you can afford and what rental rates you can charge to cover it.
If the rent does not cover the mortgage, it’s not a smart financial move. Remember as the landlord it’s your job to cover the costs of any property maintenance too so you’ll also need spare cash for repairs and void periods of vacancy.
And, don’t forget tenants who fail to pay their rent too – not only does it mean you’re subsidising their housing when they don’t pay up but it’s an expensive business to have them evicted from your property. This could take up to several months because of legal protection laws for both parties.
Make sure you have a margin of at least 20% between the rent you get in from the property and the amount you have to pay for your mortgage each month.
Offset mortgages are an example of a flexible buy-to-let mortgage which lets you enjoy some of the benefits of both the repayment and interest-only mortgages. With an offset, your savings are linked to your mortgage so instead of earning interest on your savings it’s taken off your mortgage. It means that you pay less interest on the amount you borrowed.
This type of mortgage is a bit more expensive than others but if you’re disciplined you could end up paying your mortgage off sooner.
Once you’ve decided what kind of mortgage you want to go for, consider a long-term contract.
Landlords now have the opportunity to offer their tenants longer-term contracts through buy-to-let lenders like The Mortgage Works (TMWs) or the Nationwide Building Society Group, the first of its kind to offer such a service. Typically, lenders let landlords offer tenants a contract of 12 months. However with long-term contract mortgages they can offer deals that last up to three years.
With the rising number of families looking to rent, the pros of the longer-term contracts could outweigh the cons for both the tenants and landlords.
“The three-year contracts appeal to a certain type of family,” says David Hollingworth, “and offer security to those not looking to move around. When they prove themselves as good tenants for that amount of time, the landlords have that sense of security. It’s good for both parties.”
So, if you’re a landlord looking for a more stable situation, these new longer-term contracts may be worth looking into.
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Once you’ve decided what type of mortgage you’ll have, you have to choose the rate of interest you want to pay. There are five main styles of mortgage rates:
• Fixed. This means the rate of interest is fixed for a number of years and you know how much you’ll have to pay. Fixed-rate mortgages are a safe and easy bet for most homeowners as they keep the rate the same for a certain period of time, avoiding any nasty surprise hikes. At the same time, they’re likely to be slightly higher than variable mortgages.
“Fixed rates will give some security against future rate rises (which may be some way off yet). Although they’ll be slightly more expensive on rate than a mainstream deal, lenders are competing hard for business so there are some very good deals,” Mr Hollingworth said.
• Variable rates move up and down with the Bank of England’s base rate. They can offer rare savings, but aren’t a good idea for the majority of investors because they’re very risky. But with the rate being at a never-before-seen low, it could be ideal for those who want to pay less interest. However, “landlords should prepare for increases in base rate and ensure that they can deal with increases.”
• Tracker rates are similar to variable rates, but they track the base rate at a set percentage, say 0.7% above the base rate.
• Discount. You get a percentage discount off the lender’s variable rate for a certain amount of time.
• Capped. With one of these the rate can go down if the base rate does but is capped at a certain amount if it goes up.
• Flexible rates let you overpay or underpay depending on your income. These are useful if you have a cash-flow problem. But you need to be very disciplined or you’ll never pay it off!