Although in the majority of circumstances Buy to Let mortgage advice is not regulated by the Financial Conduct Authority, we will still make our recommendation on the most appropriate buy to let mortgage for your circumstances as if we were giving regulated mortgage advice.
We have access to many exclusive buy to let mortgages that would not be available even if you applied directly to the mortgage lender. We pride ourselves on the exceptional service that you will receive and will take your buy to let mortgage from initial enquiry through to obtaining a credit scored decision in principle followed by submission of your mortgage application and then finally to successful completion of the mortgage.
We have come through a turbulent period in the Buy to Let market with many of the mortgage lenders having previously disappeared altogether & buy to let mortgage criteria being significantly restricted. Fortunately new entrants have launched & re launched into the buy to let mortgage market and loan to values are now being pushed again to 85% and there are more choice of lenders willing to proceed with 20% deposit or 25% deposit at more competitive rates.
We have prepared a useful guide so please select the tabs below to discover more.
Introduction to Buy to Let Mortgages
The Buy to Let market has been through a turbulent time over the past decade and following recovery from the credit crunch, many borrowers were put off expanding portfolios following the taxation changes to the handling of mortgage interest relief and the additional premium charged to stamp duty land tax for 2nd and subsequent properties. From lending statistics issued by the Bank of England, Buy to Let lending dropped from 21.1% of gross advances in Q1 of 2016 to 13.1% in Q2 2016 (£7.6bn) as the 3% Stamp Duty Land Tax premium was introduced on 1st April 2016.
The Covid-19 Pandemic also hit the market hard and although buy to let lending in Q2 2020 equated to 13.3%, this was out of a total market size of only £44.1bn (£5.87bn in buy to let lending), 33.3% lower in overall borrowing than Q2 2019.
The ‘accidental landlord’ borrower has now all but disappeared although portfolio landlords are starting to increase their portfolios again especially with many lenders now offering Limited Company mortgages to avoid the adverse tax rule changes for higher rate tax payers, Buy to Let lending in Q2 of 2022 accounted for 13.6% of all lending (£10.59bn) which was a 2.2% increase on the same period a year before.
However, landlords now face a fresh challenge with the ‘cost of living’ crisis which coupled with the Bank of increasing base rate in an attempt to combat inflationary pressure in the economy, will significantly restrict borrowing capacity.
Buy to Let lenders use an ‘Interest Cover Rate’ stress test to calculate the maximum advance available and a rise in base rate restricts the borrowing available unless the rental income also increases however, rental yield tends to be driven by market forces and rents will simply not go up just because base rate rises.
Property has always been seen as the must have investment and although it can usually provide a good investment return and reasonable capital growth, given current market conditions, rising base rate and detrimental tax rules, will this be the case in the future?
If you are looking for advice relating to specific areas of buy to let mortgages then please feel free to contact us to discuss your specific requirements or alternatively, follow our brief guide over the next few pages as well as making use of our buy to let mortgage calculator and mortgage sourcing tool to find the best rates.
We offer a wide range of products from High Street Lenders and specialist products not available direct from a lender and can offer buy to let mortgage advice on over 600 different buy to let mortgage schemes currently available in the UK buy to let mortgage market.
Buy to Let Mortgages - Deposit
Historically, if you were to approach a bank on a ‘commercial’ basis to buy rental property then they most certainly would be looking for a deposit from you of at least 30% (So if the property was valued at £100,000 then they would require you to fund £30,000 and would lend you £70,000). As the demand for buying rental properties was booming, specialist lenders saw the potential in the new emerging market and the specialist buy to let mortgage market was born. This made it easier for landlords to arrange funding, meaning lenders would only ask for 20-25% deposit.
During the boom, the market moved on (perhaps too much with hind-sight) and it became commonplace for the required deposit to be only 15%. There were even lenders that were willing to accept only 11% deposit however the achievable rental yield tends to drive the amount of deposit required and in essence whether a property is a viable proposition or not to the investor.
The market has now come full circle and following the credit crunch, Covid pandemic & cost of living crisis with base rate rising significantly to combat rising inflation, loan to values have been restricted and deposit requirements vary from lender to lender although typically, 25% is required subject to status and achievable rental income. Realistically, the more deposit that you are able to put down on the proposed purchase then the better rates that will be available to you.
With property prices tipped to contract and base rate increasing, the days of 15% deposit in buy to let lending are long gone, although there are a small number of schemes offering 20% deposit. However, in reality getting the Interest Cover Rate (ICR) stress test to fit may prove a difficulty and you will need at least 25% deposit for remortgage or purchase.
Don’t despair if you have an existing deal arranged at 85% loan to value as fortunately, many lenders are now offering product transfer rates for existing borrowers so we may be able to arrange a new product with your existing lender, which avoids being stuck on the lender’s standard variable rate.
Buy to Let Mortgages - Rental Yield
Rental yield is quite simply the return on your investment and is calculated by the annual anticipated rental income as a percentage of the purchase price of the property. A family/ professional let ought to be earning in excess of 4% and a house in multiple occupation (HMO) or multi unit block (MUB) in excess of 7%. However, this is not the only investment consideration and you may decide that potential future capital growth is a consideration to outweigh the yield in making a buying decision.
Lenders will use the rental yield to assess the maximum that they are willing to lend against a particular property and are usually looking for an interest cover rate (ICR) of between 125% & 145% (subject to whether an applicant is a higher rate tax payer, taking a pound for pound remortgage, capital raising or utilising a Limited Company) and this is based on either the pay rate of the product (if selecting a 5 year + fixed rate) or a stressed notional rate of typically 5.5% for any other product term. This can significantly impact on the borrowing capacity offered:
- Rental Income £750 per calendar month = Annual rental income of £9,000
- Purchase Price of £200,000 giving 4.5% annual rental yield
If selecting < 5 year fixed rate, the maximum advance will vary from £112,852 to £130,909 (using either 125% or 145% at a notional rate of 5.5%) meaning a minimum of £87,148 in equity / deposit (44%)
However, taking at least a 5 year fixed rate, based on rates correct as at November 2023, it would be possible to borrow £150,000 meaning £50,000 required in equity / deposit (25%).
This example is provided for illustrative purposes only and is not a guarantee of lending being offered at this level as a full assessment of individual circumstances will need to be undertaken. It is only intended to provide an explanation of how lenders calculate the maximum advance available when assessing a buy to let application and you should contact us to discuss any specific requirements.
