Mortgages and Investment Property
There is a common misconception that buy-to-let mortgages are prohibitively expensive and very restrictive. While there is no getting away from the fact that investment mortgages do cost more, the interest rates available tend not to be significantly higher than those on standard mortgages.
Lenders consider buy-to-let a greater risk and so demand a greater return. It means rates are typically between 0.75 and 1.25 per cent higher than those available to the residential market.
The deposit required for buy-to-let mortgages is higher too. Most lenders will insist on a deposit of at least 15 per cent of the property’s value, and some will want considerably more. With the price of the average house in the UK now above £200,000, it means investors should have in excess of £30,000, especially with legal fees, surveys, insurance, furnishings and renovations to pay for.
Hunt for a Bargain
As with standard mortgages, a range of tracker and fixed payment mortgages are available for buy-to-let properties. Time has to be spent searching the marketplace for the best product, and the size and term of mortgage, value of property and amount of deposit will all influence the type and number of products offered. In general, the bigger the deposit, the better the interest rate available. Be aware that if the mortgage is arranged through a broker, it can incur up to 1.5 per cent of the mortgage value in broker fees.
Landlords have a choice between interest only and repayment mortgages, but will have to jump through some extra hoops to satisfy lenders. Buy-to-let mortgage lenders usually base their decisions on whether or not to approve a loan on the likely rental income from the property. The income of the applicant is less important and, in some cases, is not even considered.
As a guide, most lenders will want to see rental income of around 135 per cent of the mortgage repayment and, order to secure finance, rental income should provide an annual yield of around eight per cent of the mortgage. In addition, the applicant should own a main residence.
Growing Demand
Attracted by the prospect of a stream of rental income in the short-term and capital growth in the long-term, the number of buy-to-let landlords has grown. By 2006, 10 per cent of all mortgages taken out by UK homeowners were investment mortgages. In the first six months of the year, more than 152,000 buy-to-let mortgages were issued, and now most high street banks and building societies offer a range of products to meet the demand.
When relying on a mortgage for finance, it is important to choose a property that will appeal to lenders. Banks and building societies tend to be sceptical if asked for a buy-to-let mortgage on a flat in a high-rise block or above a shop, or on an ex-council property, so try to avoid properties that lenders will consider to be a greater risk.
If buying an investment property to renovate and sell on at a profit, it is not as important to secure a competitive mortgage deal as the idea is to turn the property around as quickly as possible and cash in.
