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Published on : February 23, 2022 16:12

How To Find The Best Deal On Your Buy-To-Let Mortgage


It is important to have the best rate in place from a buy-to-let mortgage in order to maximise the rental income from your property. We want to make sure you have that best rate in order to achieve the results from your property that you deserve, and that you know how to find the best deal on your buy-to-let mortgage.


Buy-To-Let (BTL) mortgages are similar in essence to traditional residential mortgages, with a few noticeable differences.

The majority of residential mortgages are capital and interest, meaning in your monthly repayments, you’ll be paying off the interest and charged a portion of the loan. Most BTL mortgages, however, are interest-only. This means that you will only pay off the interest on a monthly basis, not the loan itself. You will need to pay the full loan back in one quantity at the end of the mortgage term.

BTL mortgages also come with high rates and fees compared to residential mortgages, as they are considered riskier for mortgage lenders. Mortgage lenders are typically concerned whether or not you will be able to continue paying the mortgage if, for example, your property remains vacant for an extended period of time whilst amassing void periods, or if your tenants are unable to pay their rent on time.

The main objective of a BTL mortgage, however, is for it to allow you to make a profit from the property. Whilst a BTL mortgage may be more expensive than a traditional residential mortgage, the rental income should do the legwork to cover these costs and give you a return on your property investment.


How much can I borrow on a buy-to-let mortgage?


The total sum you can borrow on a BTL mortgage depends on two factors:

1. Your deposit

When you’re purchasing a BTL property, you’ll normally need to put down a deposit that’s at least 15 per cent of the property’s value. However, many lenders will want a deposit of 25 per cent or more, while you’re likely to be able to access the best rates if you can put down a deposit of 40 per cent or more.

This is all to do with the loan to value ratio (LTV). LTV refers to what percentage of the value of the property you’re taking out as a loan.

An example is that if you are purchasing a property at £120,000, and put down a £30,000 deposit (25 per cent), you’ll be borrowing the remaining £90,000 (75 per cent) from your lender. This means you have an LTV of 75 per cent.

Many lenders won’t want to give you an LTV of more than 75 per cent for a buy-to-let property. This is because, if you don’t keep up with your monthly mortgage repayments, your lender will need take possession and sell your property to make their money back. Normally, they’ll do this for a discount at auction to make things happen quicker. The higher the LTV, the more likely it is that they won’t be able to sell the property for enough money to get their loan paid back in full.

Whilst you can usually get the best rates if you go for a lower LTV, you should look to do the maths first. If you’re starting to build a property portfolio or you’re going to refurbish your property, you might want to keep some money and go with a higher LTV. It depends solely on your strategy, as every landlord and property investor is different.

2. Your rental income

With a BTL mortgage, the chances are you’ll be relying on the rental income you receive to be able to afford your monthly mortgage repayments. Therefore, your lender will do conduct checks to work out how much income they think you can generate from your property, before deciding how much they’re happy to lend you.

As part of this, they will take the interest rate of the mortgage you’ve applied for and add 2 per cent (to a minimum of 5.5 per cent). Then, they’ll check to make sure that your yearly rental income will be at least 125 per cent of that figure (although 145 per cent is becoming increasingly common). This percentage is known as the interest coverage rate, or ICR.

If for example you were looking to borrow £100,000 and your interest rate is 3 per cent, your lender will add 2 per cent to your interest rate, bringing it to 5 per cent. Because that’s below the minimum interest rate, they’ll then round this up to 5.5 per cent. This would bring the yearly interest to £5,500 (because that’s 5.5 per cent of the amount you want to borrow). Your lender will then times this by 145 per cent (or 125 per cent, depending on the lender’s ICR), to get to a final figure: £7,975.

This means that, over the course of a year, you’ll need to be able to earn at least £7,975 in rent from your property.

The idea is that this way, you’ll have enough income to easily cover your mortgage repayments along with all your other landlord costs (like insurance and maintenance) – even if you end up with gaps between tenancies. If your lender doesn’t think that’s possible, they won’t let you have the mortgage.


Limited company BTL mortgage versus personal BTL mortgage


There are two ways you can apply for a BTL mortgage. The first is to do so on a personal basis as a landlord. This is where you buy the property and take out the mortgage in your own name.

However, you can also get a buy-to-let mortgage as a limited company. This is where you set up a company, and then buy the property and take out the mortgage in the company’s name, rather than as an individual.

As every property investor is different with their own varying strategy, there is no definite answer as to which is the better outcome overall. There are both pros and cons to obtaining a BTL mortgage as a limited company:

Pros

  • Mortgage interest tax relief: The change from tax relief to a tax credit from 2017 only applies to private landlords, not companies. So, if you fall into the higher tax bracket, you could avoid paying tax on the income you use to pay your interest by setting yourself up as a company.
  • Limited liability protection: If your BTL property runs into financial trouble, you’ll have more protection as a company. That’s because it’ll be treated as a separate legal entity. In other words, if it goes bankrupt, your personal assets (the stuff you own) will be protected.
  • Splitting income: A company gives you more flexibility in terms of where the income from your rental property goes. For example, you could give friends and family members shares in your company which they can benefit from should your limited company perform well.

Cons

  • Rates are lower: BTL mortgage rates are more expensive for companies than they are for private landlords. So, even though you’ll get mortgage interest tax relief, you could still end up worse off overall.
  • Stamp duty: If you decide to switch your BTL mortgage over to a company one, you’ll have to pay stamp duty all over again.
  • Taxes get complicated: Your rental income will need to go into your company’s bank account, not yours. So, your company will have to pay corporation tax. This is lower than an individual’s tax but if you also want to pay yourself, you’ll then have to pay tax on it too.

Switching to a limited company could be a great move for some investors, but you should only consider this step if you are guaranteed to make a considerable saving.


How to get a buy-to-let mortgage and find the best deal


The majority of banks who offer traditional residential mortgages will also offer BTL mortgages, as well specialist niche lenders. The requirements and rates, however, will be noticeably different. Not only will they all offer different interest rates, but some will charge additional fees too. As with a traditional mortgage, your best option is to compare rates and find the best one suitable to your circumstance, before making any significant financial commitments.

Our in-house BTL mortgage experts have access to an expansive range of rates split across the main high street lenders and the specialist niche lenders, and are able to source the best rates based on your requirements and circumstances. Not only that, but they will guide you through the whole process, and carry out the heavy lifting for you. They can even advise on whether you should apply for a BTL mortgage as an individual landlord, or as part of a limited company.

To have a free consultation with one of our BTL experts, click below or give us a call on 0161 826 2998.

Book your Buy-To-Let Mortgage Appointment today

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