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A Buy to Let mortgage is a mortgage on a property, which is to be let out, or rented, rather than occupied by the owner. A Buy to Let mortgage is exactly as it sounds - a mortgage that allows you to buy a property in order to let it out to a tenant. The popularity in Buy to Let mortgages has meant there are a number of options available to finance your purchase offered by a large and increasing number of lenders in the Buy to Let market, each with differing criteria.
A Buy to Let mortgage is a way to enable you to invest in property. The criteria for lending is worked out differently to a standard mortgage and there is no limit on the number of properties you may Buy to Let, though some lenders will have a maximum or minimum number of properties which they are willing to lend on.
The difference between Buy to Let and Residential mortgages is that the maximum loan-to-value (LTV) is usually lower for a Buy to Let, meaning that a larger deposit is required. Other restrictions may also apply, such as minimum letting terms and minimum rental income.
Lenders will normally incorporate a proportion of the rental income when calculating how much money they are willing to lend you. With a residential mortgage, the total mortgage repayments are based on the applicant's salary. With a Buy to Let mortgage, most lenders insist that the rental income received will be over and above the mortgage repayments.
As from November 2004 most types of mortgages have been brought under the regulation of the Financial Services Authority. Buy to Let mortgages do not come under these rules and are not currently regulated by the Financial Services Authority.
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There are many different mortgage options available, and it's just a matter of picking the one that suits you. We recommend that you seek independent advice, and talk to other people who have already entered the Buy to Let market.
Variable
The basic mortgage rate, which most lenders offer, is a standard 'variable' rate (SVR). This generally moves up or down according to the Bank of England Base Rate changes.
However, banks and building societies do not always pass on these changes to their customers, or delay doing so, which can make it worthwhile shopping around. Special rate deals revert to the variable rate at the end of the 'discounted' period.
Some mortgage lenders guarantee their variable rate will remain within a certain margin of the Bank of England base rate at all times. Alongside the standard variable rate, lenders offer a variety of other rates and a range of special deals, which specific terms and conditions. These take the form of fixed, discounted, capped, LIBOR, base-rate tracker and flexible mortgages and deals that offer incentives like cashback.
Base Rate Tracker
These faithfully track, by a set percentage, the Bank of England Base Rate. Every time that base rate changes so will the payments on your mortgage. This is fine when rates are going down as they ensure you immediately benefit from any savings, whether or not your lender has decided to pass on the change by lowering its standard variable interest rate. However, if interest rates go up, then so will your payments and you could be paying above the odds if your lender decides not to pass on some or all of the rate increase to its other customers.
A further advantage of tracker mortgages is that many lenders are now adding flexible features to them, such as the facility to over and underpay each month.
Discounted Rate
This type of mortgage gives a discount on the lender's standard variable rate for a specified period. This means that whether the interest rate goes up or down, you will always be paying a reduced rate for as long as the discount lasts. If interest rates are falling these deals can be very good news. Likewise, when rates rise you will always be paying less than borrowers on the SVR. In any period when the Bank of England Base Rate may be falling and expected to drop even further, discounted deals would always prove to be popular with borrowers looking for a special rate and prepared to take the risk that rates may rise in the future.
Discounted rates are worth considering if you think the rate will average out below the fixed and capped-rate products in the market. Be warned, through, discounted deals can have stringent redemption periods attached.
Fixed Rate
This type of mortgage sets the interest rate you will pay for a given period of time - thereby guaranteeing that the amount you pay back each month will not change for that period. When the fixed time period expires, you will revert to the lender's standard variable rate. The obvious advantages of fixed-rate mortgages are that if you are having to budget carefully over the first few years of your mortgage then you know how much you will be paying each month and you won't be caught out by any surprise increase in the interest rate. Likewise, if interest rates rise above the fixed rate you are paying then you have the satisfaction of knowing you are saving money. The reverse is also true. If interest rates drop below the fixed rate you will lose out, but you will still be sure of how much has to come out of your bank account each month.
Fixed-rate mortgages usually last between 1 and 5 years, the best rates occurring in the 1 to 3 year time frame. Some lenders offer fixed-rate mortgages lasting 10 years or more - in some cases, the full length of the mortgage term. How long a fixed rate you opt for will depend on your view of how interest rates are going to move over the next few years, as well as the comfort you may get from knowing that whatever changes do occur, your payments each month will not change for that period.
Capped Rate
A variation on the fixed-rate mortgage, capped-rate mortgages guarantee that your monthly payment will never go above a set figure (or 'cap') within the time period. Below that set figure, the rate will move up and down in the line with the lender's variable rate. This means you can be certain of the maximum amount you will pay and may benefit from lower rates as interest rates fluctuate.
Cashback Mortgage
Under cashback schemes, on completion of your mortgage your lender gives you a cashback cheque which you are free to spend on whatever you want. The payment is a tax-free lump sum, normally either a set figure or a percentage of the total mortgage loan. Cashback offers can be ideal if all your saving have gone into providing a deposit for your new home, leaving you short of money to furnish it or pay for the move.
On the negative side, cashback deals inevitably tie you in to the lender's standard variable rate for a number of years, with an early redemption penalty that can be 3 to 6 months interest or the repayment in full of the cashback amount.
Libor Rate
LIBOR stands for London Inter Bank Offer Rate. It's the rate of interest at which banks offer to lend money to one another in the so-called wholesale money markets in the City of London. Money can be borrowed overnight or for a period of in excess of 5 years. The most often quoted rate is for 3 month money. '3 month LIBOR' tends to be used as a yardstick for lenders involved in high value transactions. They tend to quote rates as 'points above LIBOR'. So if 3 month LIBOR were (say) 6 per cent, a bank may choose to lend to another bank at (say) 6 ¼ per cent. e.g. ¼ per cent above above 3 month LIBOR.
Lending to individuals tends to be based on base rates, which are set by the Chancellor after consulting with the Bank of England. Base rates tend to be less volatile. Some home lenders offer mortgage rates linked to LIBOR. The lender offers funds in Sterling or in a foreign currency. Bear in mind that LIBOR-linked borrowing by individuals is higher risk, especially if you are borrowing in a foreign currency.
The LIBOR rates are set each day at 11am by leading banks but rates fluctuate throughout the trading session according to sentiment about the outlook for base interest rates. LIBOR rates are listed each morning in the Financial Times and other newspapers.
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There are a number of common, basic mistakes when it comes to choosing a Buy-to-Let mortgage. Mistakes usually occur as a lack of thought or research goes into arranging the mortgage after a lot of hard work has gone into sourcing the property.
Firstly, look for any costs associated with your mortgage as well as the advertised interest rate, and not just things such as an arrangement fee or booking fee. Some lenders for example, charge a fee for 'reviewing' each tenancy agreement on the property, charging this each time a tenancy agreement is submitted to them. A landlord who intends to take advantage of the higher rents offered by short term lets may find themselves paying hundreds of pounds each year to their mortgage lender in charges in order to do so.
Penalties for early repayment can also be a significant cost. As a general rule, the cheaper the rate, the greater the penalty. Some lenders lowest rates often attract lengthy and sizeable penalties. The key with redemption penalties is, in the event of an unexpected financial disaster you do not find yourself having to sell the property quickly when your mortgage is subject to extensive penalties. Many mortgages attract penalties that 'overhang' the initial incentive period such as a low initial fixed rate, so even after your mortgage payments increase your are still subject to repayment penalties for anything up to another 5 or 6 years. Mortgages without any redemption penalties may appear more expensive in terms of interest rate but give the flexibility of being able to sell the property at any time without factoring in additional costs.
Secondly, as many landlords will take out a loan on an interest only basis there is the issue of the actual mortgage term. A set term of say, a decade, may seem just right for your current plans but the end of that term may fall at a time when house prices have taken a turn for the worse, leaving you in a position of having to approach the lender to extend the term. For whatever reason the lender may be unwilling to do this, forcing the sale of the property at a potentially unprofitable time or hurriedly arranging a new mortgage when your own circumstances may not be looked on as favourably. Taking the loan over the longest term possible will keep your options open even if you do not have any specific plan of when you intend to sell the property. Try to retain the flexibility to get out of a mortgage when it suits you, not your mortgage lender.
Thirdly, be careful about borrowing a high percentage of the purchase price against each property. In an attempt to grow their portfolio more quickly many investors will pay as small a deposit as possible when purchasing properties. A 75% mortgage as opposed to a 85% mortgage will give a far more significant safety margin in the event of having to sell the property at a time when prices are not favourable. Taking a repayment mortgage will decrease the amount owed every year, making the investment safer as the years pass.
A further point is that each mortgage provider will impose certain terms and conditions and these need to be agreeable to the particular area, property or tenant type intended. Many lenders will not accept letting mortgaged properties to individuals on housing benefit, limited companies or asylum seekers so if you have plans to let to this type of tenant or would like to in the future, make sure your mortgage lender will allow it.
The main thing to be aware of when choosing your Buy-to-Let mortgage is to plan for different scenarios. It is rare that everything goes to plan all of the time as a landlord and a mortgage lender who understands that flexibility is key when letting property will help you to avoid being forced to either sell your property, pay penalties to move your mortgage or force certain tenant types to be passed up.
The right advice could save you a considerable amount of time.
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Many property Investors give little consideration to their mortgage requirements and see it as an obstacle to be overcome to allow them to achieve their aims. We urge all new landlords to read the information below before getting a quote for a Buy to Let mortgage.
