Buy-to-let lending has reached its highest point since the start of the recession.
Lenders made £5.1 billion worth of loans across some 40,000 mortgages during the second quarter of 2013, according to new figures from the Council of Mortgage Lenders (CML)
CML head of policy Jackie Bennett said: “Strong rental demand is contributing to the continuing expansion of the buy-to-let sector, but growth is also being helped by improved conditions in funding markets and more widespread availability of mortgages.”
The number of first-time buy-to-let borrowers is also on the rise, with levels of first-time lending at their highest level since 2007. Buoyed by rising rental demand and low rates, more prospective landlords are entering the market. So what do you need to consider when applying for your first buy-to-let mortgage?
1. Concentrate on the property
The property itself is a key factor in your mortgage application. The prospective lender will want to be sure that it is a reasonable bet, and this will be judged on a number of different criteria. The ‘headline’ factor is prospective rental income as a proportion of the mortgage payments. Most buy-to-let mortgage providers will expect applicants to be able to show that they will can at least 125 per cent of their mortgage payments through rental income. This requires you to find a property that you are confident will be occupied, in an area with a proven record of a strong lettings market.
2. Understand LTV
Buy-to-let mortgages are considered a higher risk than their conventional home loan counterparts. One of the practical implications of this is that you will generally be expected to put down a higher deposit. Look at the LTV, or loan to value ratio, advertised with the mortgage deal. This figure indicates the amount that you will be able to borrow as a percentage of the total purchase price. For example, if the LTV is 75 per cent, you will need at least a 25 per cent deposit. Don’t be surprised to see LTVs as low as 60 per cent, and remember that higher LTVs tend to be reserved for applicants who are deemed to be the lowest risk.
3. Make sure you’re eligible
In addition to looking at the property, the mortgage provider will check your own situation against a series of criteria. Most lenders require that you are over the age of 25, and that your income meets a minimum level - normally at least £25,000. You will almost certainly also be required to pass a credit check. If you are worried about this, read about how to improve your credit score in advance of making a loan application.
4. Remember they’re interest-only
Most buy-to-let mortgages are interest-only loans. This means that you will only pay off the interest on the loan each month, and will not pay down the capital sum outstanding. Instead, you pay off the loan when you sell the property.
This puts you at risk from fluctuating property prices. They myth that prices could only ever go inexorably upwards was abruptly punctured by the 2008 crash. While prices are indeed increasing currently, it is important to remember that they may not always continue to do so.
5. Don’t use a standard home loan
Finally, it is vitally important to remember that you cannot use your standard home loan if you want to rent out your property. Your current lender may be willing to transfer your mortgage into a buy-to-let arrangement, but you must contact them if you intend to rent your property out.