A new landlord’s guide to BTL mortgages
- 27th November 2023
- Landlord Property News
If you are thinking about becoming a landlord for the first time, then unless you already own the property that you will be letting outright you will need to consider a buy-to-let mortgage.
This is necessary even if you already have an outstanding owner-occupier mortgage on your property, since the extra risks of a buy-to-let property mean that if you fail to inform your lender you will now be renting out the property, your existing mortgage could be invalidated.
In this case, some lenders will make you switch to a buy-to-let mortgage, while others will grant a ‘consent to let’ on your existing mortgage deal. The latter is often a short-term measure of less than 12 months however and usually comes with a fee, although this isn’t high.
Deciding on rental types
Your lender will also want you to confirm the type of buy-to-let you will be operating – so whether it’s a normal assured shorthold tenancy, a holiday let or an HMO.
Taking out a buy-to-let mortgage requires forward planning, since most are provided on an interest-only basis. The benefit is that your monthly payments are smaller, giving you greater earning capacity than if you were repaying the full value. However, at the end of the mortgage term the capital of the loan will still need to be repaid or refinanced. This could be done with the sale of the property since you won’t require it to live in, through other financing or by remortgaging the property.
Buy-to-let mortgages tend to require a higher deposit than a standard mortgage may demand, with a deposit of around 20-25% typical. Of course, as deposits increase, mortgage costs decrease and with a 40% or above deposit you are likely to be able to access some of the best deals out there.
Higher fees and interest rates
Buy-to-let mortgages are also likely to include higher upfront fees than standard deals, so beware of this when comparing deals between lenders. Look carefully at how potential lenders are structuring fees as some will charge a set fee, others a percentage of the loan value. Buy-to-let mortgages also typically have higher interest rates, typically around 1% more than standard residential mortgages.
Fixed vs variable interest rates
Fixed rates provide certainty as you know what you are paying, versus variable rates that go up and down are aligned to the performance of the economy.
With inflation starting to come down the general view is that interest rates have peaked and indeed may fall by Q3 2024 so bear in mind that, once you have fixed your rate, you can’t look again until the end of the term.
Tougher affordability tests
In recent years tougher lending restrictions imposed by the Bank of England have meant landlords must pass stricter affordability tests, so this is another consideration as a new landlord.
Rather than simply looking at your earning potential (although they will look to check you have a minimum £25,000 earning capacity from a job or self-employment) they look instead at the earning potential of the property. This is done by using interest cover ratios (ICRs) to estimate your potential profit. The figure is the ratio to which a property’s rental income must cover the buy-to-let mortgage payment; stress-tested at a representative interest rate, typically between 5-6%.
Test limits start at 125% - which means the rental income should be a minimum of 125% of the landlord’s mortgage payments. However, limits of 145% are not uncommon.
At ludlowthompson we are proud of the trusted relationships we have built with our clients during 30 years in business. As well as our experience in the buy-to-let market we also offer access to leading buy-to-let mortgages, including exclusive offers you won’t find elsewhere. To find out how we can help advise you on becoming a first-time buy-to-let landlord get in touch with an expert at your local branch today. We offer a range of services and promise to deliver maximum performance, communication and trust for the London market.
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