Building or expanding a buy-to-let portfolio requires a significant financial commitment; one that many landlords will want to do with the help of a mortgage. To help you get started, whether as a first-time investor or as a seasoned portfolio establisher, here is our landlord guide to buy-to-let mortgages.
Building a property portfolio to provide you with a passive income is a radically different experience from buying a traditional home to live in.
It is a decision that needs to be fuelled by rigorous due diligence, and whether or not the financial income will stack up from the investment.
Some landlords and property investors prefer to invest entirely in cash, as this eliminates the need to wait for a mortgage valuation and approval.
Unless you are a cash buyer, however, then you will need to apply for a mortgage. As a standard residential mortgage only applies if you intend to live in the property, most lenders will only allow you to let to tenants by taking out a buy-to-let (BTL) mortgage.
BTL mortgage lenders typically require a deposit of anywhere between 20 – 25 per cent of the value of the property you wish to invest in. Prior to the COVID-19 pandemic, some BTL mortgages were available to landlords and investors with a 15 per cent deposit, but many of these rates disappeared during the outbreak.
As with standard residential mortgages, the bigger the deposit you put down, the better the rate you’ll be able to get. The best BTL deals are usually available to investors with deposits of 40 per cent and more.
When assessing your affordability, lenders will consider your current portfolio (if you have more than one property) and any previous history of obtaining and paying off BTL finance.
Buy-to-let mortgage rates were falling in the five years prior to the pandemic.
In November 2020, the average fixed-rate buy-to-let mortgage had an interest rate of 3.1 per cent, down from 3.99 per cent five years earlier.
Variable-rate deals followed a similar pattern, before rising in cost significantly after the COVID-19 outbreak. This hike reflects the vast majority of variable deals being withdrawn after the Bank of England base rate was cut twice.
Some seasoned portfolio landlords create limited companies under which they purchase their BTL investments. Company BTL mortgages make up a relatively small percentage of the market, but numbers have been on the rise in the last few years.
As every property investor and their investment strategy is different, creating a company to shape a BTL portfolio from may not be relevant to you or your strategy. The interest rates on these deals tend to be significantly higher than those available to individual borrowers, and you may benefit from speaking to a mortgage advisor based on your circumstances.
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When comparing mortgage rates and deals, it is important for landlords and property investors to assess the overall cost of the loan, and see how it stacks against the potential rental income. A cheap initial rate on a BTL mortgage can be dampened by high fees.
An upfront fee on a BTL mortgage can be significantly higher than a traditional residential mortgage.
The best method to compare the rates and deals available on the market, ranging from high street to niche lenders, it to speak with a proven BTL mortgage financial advisor.
There are wide variety of deals available for landlords, but they come with strict affordability rules.
In recent years, the Bank of England has looked to cool what it considered to be an overheating buy-to-let market by imposing tougher lending restrictions.
As part of their affordability assessments, lenders use interest cover ratios (ICRs) to calculate how much profit a landlord is likely to make.
A lender’s ICR is the ratio to which a property’s rental income must cover the landlord’s mortgage payments, tested at a representative interest rate (most banks currently use 5.5 per cent).
Lenders are required to test at 125 per cent, meaning the projected rental income must be at least 125 per cent of the landlord’s mortgage payments. However, many impose higher levels of around 145 per cent.
Professional landlords with four or more properties are often described as ‘portfolio landlords’.
This is an important distinction, as rules introduced by the Bank of England back in October 2017 made it harder for these investors to access additional finance.
Previously, portfolio landlords could provide their overall profit/loss figures when applying to borrow more money or remortgage a home in their portfolio, but this has changed.
Now, you’ll need to show mortgage details, cash flow projections and business models for every property you own when applying for finance.
If you have a heavily mortgaged portfolio, you may find that these regulations make it more difficult for you to obtain extra funds.
Portfolio landlords also face some other restrictions, which vary from lender to lender.
For example, some lenders will set a maximum number of properties you’re allowed to have in your portfolio (up to 10 being the most common) and others use different ICRs and representative interest rates depending on how many properties you have.
Other rules imposed by individual lenders include limits on maximum loan-to-value (LTV) ratios across a portfolio (for example, your overall portfolio must be at 65 per cent LTV or lower), or the stipulation that the ICR from every property in your portfolio must be above 100%.
Some banks adopt a more holistic approach to lending by using a system known as ‘top slicing‘.
Top slicing takes into account a landlord’s personal income away from their portfolio – such as a salary or pension – and includes it in affordability assessments.
This means that if you have significant earnings away from property, you could theoretically use your personal income to bridge any shortfall when you’re assessed by lenders.
Only a handful currently adopt this approach, so if you think top-slicing could benefit you, it’s best to discuss this with a mortgage broker.
A raft of taxation changes – including cuts to mortgage interest tax relief and the 3% buy-to-let stamp duty surcharge – has resulted in many landlords deciding to refinance their portfolios rather than adding to them.
Lenders have historically attempted to attract landlords by cutting their upfront fees or offering cashback – but these types of incentives have largely dried up since the COVID-19 outbreak.
If you’re struggling to get on to the property ladder in your area, you might be considering buying an investment property elsewhere and letting it out.
The good news is that it is possible to get a buy-to-let mortgage as a first-time buyer – but it’s not necessarily easy.
For example, you might need a bigger deposit than other investors to get a good deal, as the number of mortgages available to you will be significantly smaller.
You’ll also be giving up on some benefits available to first-time buyers – especially when it comes to stamp duty. This is because, if your first property isn’t one that you will live in yourself, you won’t qualify for first-time buyer relief.
You also won’t pay as much as a non-first-time buyer purchasing a buy-to-let: you will instead be charged the ‘home mover rate’, which is the same rate that a non-first-time buyer purchasing a home to live in would pay.
If, at a later date, you end up buying a property to live in while hanging onto your buy-to-let property, you’ll have to pay the full buy-to-let/second home surcharge.
You might also find it more difficult to get a mortgage when you come to buy your first home to live in yourself, as lenders will assess any debt you have outstanding on your buy-to-let mortgage.
Finding the best BTL mortgage tailored to your circumstances is crucial to getting the best return on investment from your investment property. Our in-house financial experts are able to analyse the market consisting of both high street and niche lenders to find the ideal rate tailored to you, so why not get in touch and book a free consultation with them today?
