NLA London Rep Richard Blanco unpacks buy to let financing…
I’m always keen to encourage people to research their own buy to let (BTL) mortgages, but there’s no doubt it can be very daunting. There are a few key concepts you need to understand and I’m going to outline them here for you.
What mortgage do I need?
Most investors choose to take out interest only loans, because the interest can be set against your rental income, making this a relatively tax efficient transaction. The lender will look at your credit file, and most expect borrowers to have their own home mortgaged or owned outright and have a minimum income of around £25,000 – although this varies depending on the lender. Some major lenders like Birmingham Midshires and The Mortgageworks don’t require earned income, but their credit score is consequently more onerous, especially at higher loan-to-value ratios (LTVs).
How will my credit score and income be calculated?
Credit scoring plays a key part and having a high credit limit on a card can increase your credit score. However, using the credit facility regularly can reduce it quite dramatically and your credit score will be spared from impairment if your balance is below 50% of your total credit limit. Lenders can be fussy about what they include when calculating your income, and most disregard the forecasted rental income that the property will command. They also tend to favour employed income from a payroll, and things like bonuses and earnings from zero-hours contracts may be overlooked.
What about lending criteria?
Rental income must cover 125% of the mortgage but almost all lenders now calculate prospective payments at a higher notional rate of 5%, rather than the agreed mortgage interested rate. This makes it harder to obtain finance and is aimed at acclimatising borrowers to the likelihood of interest rate rises in the short to medium term. Lending policy also tends to favour landlords with smaller portfolios and most lenders place a cap on how many properties you can own, regardless of who the loan is with – usually between 3 and 10 or if not, a cap on how much you can borrow overall.
And what interest rates should I expect?
In 2009, typical buy to let interest rates were around 5.25% with often an arrangement fee of around 2.5% of the loan applied, but thankfully rates and fees have fallen considerably, and at 75% LTV you are now looking at an interest rate 2.5% to 3.5% with fixed fees of less than £2,000. If you have a bigger deposit and can stretch to a 65% LTV, rates can be as low as 2%. New entrants like Virgin Money, The Mortgage Trust, Precise and Aldermore – though not always the cheapest – have helped to increase competition.
How long will the process take?
The whole application process can be very slow and pedantic – with an average completion of 8 weeks –and the big three BTL lenders have about two thirds of market share partly because of their speed and efficiency: TMW, BM and Godiva.
Should I use a broker?
Around two thirds of landlords choose to use a broker but be aware they may steer you towards specialist lenders who are not necessarily the best value. Often building societies who mostly deal direct with customers can have some of the best deals, so try carrying out your own research by looking at interest rates for example on the NLA Mortgages search engine, or Moneyfacts before deciding either way.
Is it ready to let?
Mainstream lenders will require the property to be habitable and ready to let in order to proceed, which means a working kitchen and bathroom and no damp or subsidence. Many won’t lend to flats over four storeys high, flats over commercial outlets or to freehold buildings containing flats. For situations where the property requires works, you could try commercial lenders like Lloyds, Shawbrook, Bank of Cyprus, private or other high street banks, but expect to pay an arrangement fee of at least 1% and interest rates of around 4% on loans of up to 70% of the value of the property. Interest-only loans are harder to come by in this sector and your repayment term will be shorter – say, 15 years instead of 25 – but there won’t be any caps on the number of properties you own.
Is bridging finance for me?
Bridging financers are the funders of last resort, usually lend on a non status basis at 65% LTV, and involve much higher costs of generally around 1% per month with no arrangement fee. It’s a bit like buying on a credit card. The advantage is the property can be in any condition – within reason, but be warned: never obtain bridging finance without a clear exit strategy and be aware that you will be stuck on it for six months before you can apply for a remortgage.
Growing a portfolio
I hope this has all been useful. Remember, once you have a mortgage, and if the property increases in value, you can think about growing your portfolio by releasing equity and applying for a further advance. People often release funds from their own homes in this way to buy an investment property. It’s called capital raising, and most lenders will allow it for the purposes of buying property, though they may insist you own the property for 6 or sometimes 12 months, and apply a lower LTV.