Finding the right buy to let mortgage is crucial to your success as a property investor. Unlike other forms of investment, a lot of the money you put into a buy-to-let property is likely to be borrowed. Over the last few years, the buy to let mortgage market has boomed, and borrowing money to invest in this way has become easier than ever. There are a number of different buy to let mortgage products available from fixed rates, discounted variable rates, discounted rates and so on. Different products may be suitable for different investment properties. Finding the cheapest buy to let mortgage may not always be the best option so there are a number of things to consider when deciding which buy to let mortgage is best. For example:
– A lender may offer a very cheap buy to let mortgage product which may carry a very attractive rate for a short while, but look at the small print. If you are then tied in for an extended amount of time at a much higher rate, then you need to calculate whether or not this is the best buy to let mortgage for you in terms of your cashflow as a landlord.
– A fixed rate with no extended tie would enable you to know exactly what your monthly repayments are so that you can calculate your profit/loss for that set fixed term.
– A discounted variable rate can be very attractive when the base rate is in the favour of the landlord and buy to let investors. Monthly repayments will fluctuate according to the decrease/increase in the base rate or LIBOR rate.
– Some of the best buy to let mortgage products may be discounted variable rate products that also offer the option of a droplock facility. A droplock facility on a buy to let mortgage means that for a fee, you can decide to switch to a fixed rate with that same lender.
How Do I Know How Much I can Borrow
This will depend on the lender and the buy to let mortgage products available as this can vary. Some lenders may set minimum salary levels whereas others may need verification that you are an experienced property investor. Others may not be concerned with the level of income providing that the rental income is sufficient. In general, most lenders will calculate the maximum borrowings based on either 125% or 130% cover. This 5% can make the difference as to whether you can borrow the full 85% or less.
The rent that a landlord receives generally has to be either 1.25% or 1.3% more than the interest payment of the mortgage. For example if you were looking to purchase a buy to let property at 100,000 the maximum loan you could achieve is 85%. Assuming an interest rate of 5% this would make the interest only monthly repayment of 355. Therefore the rental income that can be achieved must be 443. This figure being 1.25% times the rental amount.
To get an idea of how much the monthly repayments would be on a buy to let property you are considering then it’s worth trying an on-line buy to let mortgage calculator to work out the repayments immediately.
However it is very important that you get the correct guidance with your finance. Questions that are worth considering when finding the best buy to let mortgage:
1. Do they have access to lots of different products in the market place?
2. Do they have the ability to create a long term property development strategy for you?
3. Are they able to secure Exclusive Products?
4. Are they able to arrange mortgages within 10 working days?
Most lenders will offer a maximum loan of 85% against a buy to let property requiring you to fund at least a 15% deposit. But this does depend on the rental income that can be achieved from the investment property. The buy to let mortgage industry is very competitive with new products being launched on a very regular basis so it is worth keeping an eye on the best deals around.
Some brokers may charge a brokerage fee up to 2% to arrange the finance for you but dont let this put you off because if they do have the ability to secure exclusive products for you, it could be very beneficial to your cashflow as a landlord. Plus, if they are able to reach formal mortgage offer stage in a very short space of time, this could result in you being able to secure property at very competitive prices if you have the ability to tell the vendor that you can have the deal completed within a matter of a few weeks.
Buy to Let Mortgage Types
Variable rate buy to let mortgages
This is the lender’s own mortgage rate and one that is subject to change whenever the lender chooses which is at the same time of base rate changes. This means that if you are on a lenders standard variable rate buy to let mortgage product then your monthly repayments will increase or decrease accordingly although they very rarely pass on the full percentage reduction to the client. This type of product does also allow the lender to change the rate even if there is no change in the Bank of England base rate. So if you are looking for something a bit more palatable why not look at your other options.
Discount buy to let mortgages
For a set period, the lender offers a reduction on its SVR (standard variable rate). Lets say, it might offer a discount of 1.5 per cent over three years. However much the SVR (standard variable rate) increases or decreases during the discount period, you always pay a rate 1.5 per cent lower.
Stepped Discount buy to let mortgages
Its also worth considering stepped discount buy to let mortgages, where the level of the discount reduces after a set period. For example, you may be offered a 1.5 per cent discount for a year, followed by a 0.75% per cent discount for the second year.
Fixed-rate buy to let mortgages
Regardless of the (SVR) standard variable or changes in the base rate, this kind of buy to let mortgage offers a fixed interest rate for a set period. The monthly mortgage repayments will remain the same giving the property investor the knowledge of what their monthly outgoings will be for a set term.
Capped-rate buy to let mortgages
The capped-rate buy to let mortgage offers a limit as to how high the interest rate can go. The rate you pay can move up and down below that level but never go beyond it. Your payments would reduce if there were any base rate decreases.
Drop-lock buy to let mortgages
This is a feature that is included in some buy to let discounted mortgages. Initially you decide to opt for a discounted product but for a small fee you have the option to drop into one of that lenders fixed rate products. At which time you would then be bound by the terms of the new fixed rate product.
Tracker buy to let mortgages
Tracker products can be a good option for buy to let investors. Tracker products offer a margin over the base rate for certain periods of time. Some will offer a buy to let tracker product which tracks the base rate plus a margin for a few years whereas recently there are more products coming on the market where they will track the base rate for the life of the loan. Providing it is a low enough margin over the base rate and the base rate remains at a comfortable level, this can be particularly cost effective to a buy to let landlord as it can avoid the necessity for regular refinancing and the costs involved in the exercise.