How to secure a buy-to-let mortgage
Buy-to-let (BTL) lending constitutes 13% of the UK’s mortgage market, with total lending to landlords already reaching £13.2bn this year. High street banks have been introducing new incentives for landlords in order to capitalise on the lucrative trend, with interest rates hitting a record low.
“The state of the BTL market is extremely healthy, with rents rising, tenant demand increasing and more lenders offering competitive deals,” said SPF Private Clients broker Mark Harris. “Lenders have also been loosening mortgage criteria, which will be particularly appealing to landlords as these have been tight in recent years.”
For example, Santander has increased its maximum loan size by an incredible 50% to £750,000, as well as relaxing its lending criteria.
As it is now easier than ever to secure a BTL mortgage, there are a few things to know before you do so. Firstly, while a repayment mortgage is often preferable for personal properties, you are likely to benefit more from an interest-only BTL mortgage. That’s because interest payments can be deducted from any rental income you make, reducing the tax you pay for your properties. Prospective cash buyers can also afford to buy more properties and generate greater rent-based cash flow plus capital gains across the spread compared to a one-off property.
Interest-only mortgages are still easy to secure for landlords, as calculations are made using the rent your property can generate rather than emphasising your alternative sources of income. Rental income will typically cover 125% of mortgage payments.
Two-year fixed rate interest-only mortgages average 4.33% while two-year trackers average 4.21%, with the most competitive rates available for borrowers who make a 40% deposit. If you have only a handful of properties in your portfolio, fixed rate mortgages offer more security, while those with larger portfolios often prefer to choose a mix for more flexible financial risk management. All borrowers should find a lender they’re happy to stay with for the long term, as arrangement fees can prove costly.
It is also useful to know that lenders are introducing new capital release allowances for landlords who want to expand their portfolios. From 4 November, Castle Trust will release 20% of a property’s value interest-free in return for 40% of any capital gains over the fixed term contract. Many borrowers will take advantage of this to fund other properties at no immediate cost to the original property’s income potential.
When entering the buy-to-let market, remember to carefully calculate your margins by considering your interest payments, running costs, maintenance fees, service charges and agency fees. In order to make a profit from the rent you charge, your monthly rate should absorb all of these costs and include an excess that can support your goals as a landlord.