Recently a gentleman walked into my office
slightly by chance, his wife was in town picking up some bits and bobs and he
had seen my recent article in his local dentist reception area. For some time
he has been interested about becoming a landlord but the finance side of things
was putting him off.
Here at Hamlet Homes we are always keen
to encourage people to research their own buy to let (BTL) mortgages, but
there’s no doubt it can be very daunting. There are a few key concepts
you need to understand and I’m going to outline them here for you.
What mortgage do I need?
Most investors choose to take out
interest only loans, because the interest can be set against your rental
income, making this a relatively tax efficient transaction. The lender
will look at your credit file, and most expect borrowers to have their own home
mortgaged or owned outright and have a minimum income of around £25,000 –
although this varies depending on the lender. Some major lenders like
Birmingham Midshires and The Mortgageworks don’t require earned income, but their
credit score is consequently more onerous, especially at higher loan-to-value
ratios (LTVs).
How will my credit score and income be calculated?
Credit scoring plays a key part and
having a high credit limit on a card can increase your credit score. However,
using the credit facility regularly can reduce it quite dramatically and your
credit score will be spared from impairment if your balance is below 50% of
your total credit limit. Lenders can be fussy about what they include when
calculating your income, and most disregard the forecasted rental income that
the property will command. They also tend to favour employed income from
a payroll, and things like bonuses and earnings from zero-hours contracts may
be overlooked.
What about lending criteria?
Rental income must cover 125% of the
mortgage but almost all lenders now calculate prospective payments at a higher
notional rate of 5%, rather than the agreed mortgage interested rate. This
makes it harder to obtain finance and is aimed at acclimatising borrowers to
the likelihood of interest rate rises in the short to medium term.
Lending policy also tends to favour landlords with smaller portfolios and most
lenders place a cap on how many properties you can own, regardless of who the
loan is with – usually between 3 and 10 or if not, a cap on how much you can
borrow overall.
And what interest rates should I expect?
In 2009, typical buy to let interest
rates were around 5.25% with often an arrangement fee of around 2.5% of the
loan applied, but thankfully rates and fees have fallen considerably, and at
75% LTV you are now looking at an interest rate 2.5% to 3.5% with fixed fees of
less than £2,000. If you have a bigger deposit and can stretch to a 65% LTV,
rates can be as low as 2%. New entrants like Virgin Money, The Mortgage
Trust, Precise and Aldermore – though not always the cheapest – have helped to
increase competition.
How long will the process take?
The whole application process can be
very slow and pedantic – with an average completion of 8 weeks –and the big
three BTL lenders have about two thirds of market share partly because of their
speed and efficiency: TMW, BM and Godiva.
Should I use a broker?
Around two thirds of landlords choose
to use a broker but be aware they may steer you towards specialist lenders who
are not necessarily the best value. Often building societies who mostly
deal direct with customers can have some of the best deals, so try carrying out
your own research by looking at interest rates.
Is it ready to let?
Mainstream lenders will require the
property to be habitable and ready to let in order to proceed, which means a
working kitchen and bathroom and no damp or subsidence. Many won’t lend
to flats over four storeys high, flats over commercial outlets or to freehold
buildings containing flats. For situations where the property requires works,
you could try commercial lenders like Lloyds, Shawbrook, Bank of Cyprus,
private or other high street banks, but expect to pay an arrangement fee of at
least 1% and interest rates of around 4% on loans of up to 70% of the value of
the property. Interest-only loans are harder to come by in this sector
and your repayment term will be shorter – say, 15 years instead of 25 – but
there won’t be any caps on the number of properties you own.
Is bridging finance for me?
Bridging financers are the funders of
last resort, usually lend on a non status basis at 65% LTV, and involve much
higher costs of generally around 1% per month with no arrangement fee. It’s a
bit like buying on a credit card. The advantage is the property can be in any
condition – within reason, but be warned: never obtain bridging finance without
a clear exit strategy and be aware that you will be stuck on it for six months
before you can apply for a remortgage.
Growing a portfolio
I hope this has all been useful.
Remember, once you have a mortgage, and if the property increases in value, you
can think about growing your portfolio by releasing equity and applying for a
further advance. People often release funds from their own homes in this
way to buy an investment property. Its called capital raising, and most lenders
will allow it for the purposes of buying property, though they may insist you
own the property for 6 or sometimes 12 months, and apply a lower LTV.
For more information about this or other potential investment properties that we
could introduce you to, or to ask about our thoughts on your own investment
choices, call us now on 01925 235 335 or pop along and speak
to us in person at our office at 6 Bankside, Crosfield Street, you
can always email me on manoj@hamletwarrington.co.uk
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