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Buy-to-Let Mortgages – Understanding Your Options

Wednesday, June 1, 2011

Once upon a time the buy-to-let mortgage was all the rage. People were snapping up investment properties with big plans to be a part of the new rich. Mortgages were cheap and easy to get into, properties were swiftly sold for handsome profits, and oh how the people partied.

Alas, hard times arrived during the summer of 2007 when the housing market crashed and out of control investors were quickly sobered into a cold reality.

As I write this article, the latest news as reported by the Council of Mortgage Lenders (CML) isthatbuy-to-let investing in the UK has risen by 22% in 2010 compared to the previous year.So the BTL mortgage is back, right? Well, sort of.

Today, mortgage lenders are more serious as they themselves are under heavier scrutiny and thus enforce fastidious new lending requirements. While they are much more particular about whom they lend to, it is important to know with the right preparation, you can in fact still get a mortgage suitable for your situation.

Performing due diligence on your property investment opportunity

First, research the market and the type of property you’re considering. Understand the risks as well as benefits. One fundamental way to lessen the risk of buying and investment property is approaching it as a long-term investment focusing on rental income versus short-term capital growth.

Explore properties that are in areas on the rise. Please understand this does not necessarily mean wealthy, but rather one which has a strong, modern appeal to it and shows an inclination towards healthy growth. Look for properties that are in areas with good schools, transportation links and close, in proximity to stylish shopping, restaurants and entertainment.

Consider meeting with property letting agents who should be knowledgeable about the area you are targeting. They will have a good feel if a particular property is the kind people are looking for and if it would likely rent well.

Believe it or not, all of this information will factor in not only your decision to invest in the prospective property, but the mortgage lender will be interested as well -- more on that in a moment.

Understanding what today’s BTL mortgage lender is looking for

In contrast to residential mortgages, the buy-to-let mortgage relies heavily on the rent that will be earned from the property as primary income. Lenders that consider your personal income do so as secondary income. 

Lenders generally prefer large deposits in the range of 30%. Lately, I have been seeing advertisements for as low as 15% but it will be very important to review its complete details. The bottom-line is the best deals are received with larger deposits (low loan-to-value).

Typically the buy-to-let lender will want your rental income to cover at least 125% of the monthly interest payment of the loan. There are other criteria the lender may require that can be stricter when dealing with a new landlord. Some will require the landlord have a job to ensure they will be able to make their loan payments. There may be minimum age requirements, limits on the amount of properties a landlord can have, and some will not lend at all to a first-time landlord.

What seems to matter most with buy-to-let mortgage lenders is your ability to repay the mortgage under any circumstances. Whether a slow housing market develops or you are without a tenant for a period of time, they want to be confident you have the wherewithal to maintain the mortgage.

In addition, they will want to know you have given careful consideration about your property’s location, as we discussed earlier, and how that may affect your ability to attract quality tenants who are more likely to pay their rent regularly and over a longer period of time.

Finding the best buy-to-let mortgage for you

With so many choices of investor mortgages available, each with their own specific set of rules and requirements, all varying depending on which lender you’re working with, I strongly suggest contacting a good local mortgage broker to help sort things out with you.

In fact, a great number of buy-to-let mortgages are offered exclusively through mortgage brokers, so you definitely want to have the largest amount of loan products available to choose from.

Consider meeting with two or three mortgage brokers. You want to feel comfortable working with him or her throughout the buying process and have confidence they will properly evaluate your financial situation and investment goals. Only then can they present the most appropriate mortgages to you.

Once you have decided on the broker and are considering a mortgage, make sure you are clear on all terms, closing costs, interest rates, and penalties, etc. Be diligent about understanding the loans fine print before you make your final decision.

Assessing the information you now have and making final decisions

Remind yourself of your investment goals. By this time you have collected market information on your potential property, decided on the best type of property for that market, and know which mortgage is best for you.

Again, I want to encourage you think long-term with your rental payments being key to your success. Very simply, your objective should be to have your rental returns significantly higher than your mortgage payments. Over time, you will want to save and build up this difference so you can re-invest in the next, great property opportunity.