Raising buy to let finance is often the most difficult task for any Landlord, buy to let investors will need to obtain finance to mortgage or purchase a property. It is now extreme difficult in obtaining new mortgage finance without an unblemished credit record or the right level of deposit. The liquidity crisis has reduced the number of products available on the market by 95% in 2009. Despite this gloomy news, there are still one million buy to let properties in the UK. All these landlords will need to ensure they have the ability to repay their mortgage via their rental income and lots will be looking to remortgage in the coming years. Landlords property may be repossessed if they cannot keep up the payments on the mortgage secured on it. This article looks at the basics of obtaining a mortgage, characteristics of landlord mortgages and some of the popular features of mortgages which are specifically useful for landlord investors…
A buy to let mortgage is sometimes referred to as a residential investment loan. They have developed over the last 20 years during the buy to let boom and are broadly similar to the characteristics of normal residential mortgages, with the exception of the following characteristics… generally speaking lenders will require a larger deposit to reflect an increase in potential risk (as homeowners are deemed to be less likely to break or damage their own property compared to tenants are who do not feel the same loyalty to the rented property they live in for a short period of time). Mortgage lenders also tend to increase the borrowing interest rate percentage above normal residential mortgages by approximately 1%, again to reflect the increased risk of defaulting landlord. Buy to let lenders expect that the rental income should be at least 130% of the mortgage repayment. This crude percentage takes into account the costs landlords must incur such as maintenance, void periods and fluctuations in local rental values. Some lenders will insist the landlord uses a qualified letting agents to manage the property, as opposed to letting the landlord manage the tenants themselves. This provides the buy to let mortgage lender with additional confidence that the tenancy is being professionally managed and that any repairs are seen to in a timely fashion, rent is collected on time every month and regular inspections undertaken by qualified agent.
A good place to start is to get some independent financial advice on obtaining a new mortgage. IFA’s will have access to hundreds of products from multiple providers and provide impartial advice, professionally assessed based on the needs of the landlord. It is sensible to shop around for the best deal ensure maximum financial return in the long run. Prior to the credit crunch, many landlords chose to remortgage and switch providers every few years in what was a competitive and cutthroat mortgage market. This shopping around mentality has now gone and landlords will have to take a long-term view and choose their mortgage provider very carefully as the possibility of switching providers becomes less attractive. IFA’s are regulated and will present options based on your written needs. Some may be tied agents to specific mortgage companies in which case they will only be allowed to discuss your requirements in the context of the products they are authorised to sell. Most IFA’s phase will also be able to arrange buildings and contents landlord buy to let insurance when going through the process of obtaining a new buy to let mortgage. Landlords can also contact mortgage lenders directly, choosing to ‘cut out the middleman’. This mentality may not always be true as IFA’s sometimes have access to deals which are not available on the high street.
The first step is to calculate how much mortgage is required from the lender. Landlords will need to look at the size of their deposit, how much they earn and the prevailing deals with regards to loan to value. The excessive income multiples used by mortgage lenders prior to the credit crunch no longer valid. Most lenders are seeking a minimum of 30% deposit. In addition, the maximum are allowable lending is usually the traditional three times of income level, for joint applicants. The loan to value is the percentage of the property value the lender is prepared to lend to you; the balance being made up of your deposit from cash. Regulatory authorities have now stated that the days of the hundred percent mortgage are now over and landlords must share the risk by stumping up larger deposits and accepting a lower loan to value ratio percentage. Mortgage companies may also impose a mortgage indemnity guarantee as a one-off cost of insurance to cover itself against the landlord’s failure to repay the mortgage.
The next step is to choose the basic type of mortgage required to achieve the investment goals set out. Mortgages contract with the lender that puts up your property as security against the loan. The property may not be resold without the loan being paid off at the same time. Failure to repay interim mortgage repayments means that the lender has the legal right to instigate repossession proceedings against the landlord. In busy urban centres where buy to let investors have rushed to buy flats for investment purposes, the number of empty properties now means that some landlords are failing to attract tenants and of failing to repay their mortgages. There are basically two types of repayment method; repayment mortgage ( made up of capital and interest), and an interest only mortgage. With a repayment mortgage the level of outstanding capital balance reduces over time to diminish to zero at the end of the mortgage term. The landlord has complete certainty that the mortgage will be repaid at the end of term, assuming all payments have been kept up. Interest only mortgages have the advantage of being cheaper on a monthly basis. However, at the end of the mortgage term landlord must have alternative finance in place in order to repay the mortgage. There are also various types of mortgages available including a standard variable rate (SVR) mortgage, a fixed-rate mortgage, a discounted mortgage and a capped mortgage.
The lender will go through a process of credit checking the landlord to ensure they are creditworthy. Lenders may also seek references from employers and request detailed financial information such as payslips, bank statements and employment records. The lender will want to check whether the landlord has been made bankrupt in the past or whether they have any county court judgements were outstanding debts against their name. For self-employed individuals, the process can be more cumbersome as they will need to prove their income by providing an audited set of accounts for the past three years. The mortgage lending company will then undertake a property valuation exercise as part of the application process. This will involve sending out a valuer to the property to assess the rebuilding costs to ensure that the mortgage provided would not exceed the cost of selling the property in event of a defaulting landlord.
Some landlords choose to repay their mortgage early by overpaying on an incremental basis, using a flexible mortgage. This has the added advantage in that flexible mortgage products provide payment holidays and underpayments (to assist in times of rental voids) as well as the ability to overpay. This provides cash flow flexibility in difficult times as well as not being penalised for overpaying to reduce the total cumulative interest on the outstanding capital balance over the mortgage term..
Assetsure provides UK landlord buy to let insurance for buildings and contents for private landlords, letting agents and property management companies in the United Kingdom.