Buy-to-let mortgage explained - Our buy-to-let mortgage guide explains some of the main factors affecting mortgage rates and runs through some of 2017’s best deals, depending on your loan-to-value ratio.
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Understanding buy-to-let mortgages
Buy-to-let mortgages vs residential mortgages
If you’re looking for a buy-to-let mortgage, there are a few things to bear in mind when you’re comparing deals. Buy-to-let mortgages tend to come with higher fees and higher interest rates than residential mortgages, and they usually require a deposit of at least 25 per cent of the property purchase price.
How are buy-to-let mortgages calculated?
To calculate what they’re willing to lend you, mortgage providers will often look at the expected rental yield. In general they will require your projected monthly rental income to be about 30 per cent higher than your monthly mortgage payment. Your salary is sometimes taken into account too.
It’s worth keeping in mind that buy-to-let lending criteria have become tougher recently when you start thinking about a buy-to-let mortgage.
What type of buy-to-let mortgage are you looking for?
When you’re trying to find the best buy-to-let mortgage, there are several factors to take into account, which will have an impact on the deals you’re offered. These are some of the main ones.
The loan-to-value (LTV) is how much money you need to borrow, relative to the property price. For example, if you’re buying a £200,000 property with a £50,000 deposit, you’re looking to borrow £150,000, so your LTV is 75 per cent.
In general, you’ll be offered better mortgage interest rates the lower your LTV is, so if your loan-to-value ratio is 60 per cent, you may be offered more competitive borrowing rates than if you’re looking at an LTV of 75 per cent.
Fixed rate or variable
Whether you’re looking at fixed rate buy-to-let mortgages or variable rates will also make a difference to the rates and fees you see when you’re comparing mortgages.
A fixed rate buy-to-let mortgage guarantees the interest rate you pay for the agreed period of time, while a variable buy-to-let mortgage fluctuates, usually in response to the Bank of England base rate.
If you opt for fixed, the length of time the mortgage is fixed for (for example, two, five or 10 years) will also have an impact on the rates you’re offered. Remember that if you remortgage before your fixed term is up, you usually have to pay a hefty penalty.
At the moment, the starting rate for a fixed rate buy-to-let mortgage will usually be higher than the starting rate for a variable mortgage, but you’re paying for the guarantee that your payments won’t rise during this period.
You may find that you can get a lower interest rate by paying a higher lender or set-up fee. You’ll need to do some calculations to work out whether paying a higher upfront fee for the lower rate will be worth it overall.
While you can usually find residential mortgages with no lender fee or a very low fee, this isn’t usually the case with buy-to-let mortgages: fees tend to be between £1,000 and £5,000.
Best buy-to-let mortgages depending on LTV
When you’re comparing buy-to-let mortgage deals, the APRC (Annual Percentage Rate of Charge) can help you choose. It’s an illustration of how much the mortgage would cost you if you kept it for the full term of the deal, taking into account the introductory rate, the main rate and the fees.
We’ve taken a look at some of the mortgages for different LTV levels. We’ve often concentrated on low APRCs, but bear in mind that if you’re planning to remortgage once your initial rate has ended, you may be more concerned about set-up fees and initial rates than the APRC.
The following rates are based on a total property price of £200,000.
Buy-to-let mortgages with 60 per cent LTV
If you’re lucky enough to have a 40 per cent deposit, the HSBC buy-to-let tracker mortgage may be worth considering. You can get a rate that tracks at 2.49 per cent above the base for the mortgage term, so it’s 2.74 per cent to begin with. There’s a booking fee of £1,797 and the APRC is 2.9 per cent.
Alternatively, Royal Bank of Scotland is offering a two year fixed buy-to-let mortgage for an initial rate of 1.95 per cent, with an arrangement fee of £1,995 and an APRC of 3.6 per cent.
Buy-to-let mortgages with 75 per cent LTV
With an LTV of 75 per cent you could consider HSBC’s buy-to-let tracker mortgage, with a rate of 3.24 per cent (variable) and a booking fee of £1,999. The APRC is 3.4 per cent.
Aldermore’s five year fixed mortgage may be worth considering too. The initial fixed rate is 3.28 per cent, switching to a variable rate of 3.23 per cent after the initial period. There’s a completion fee of £3,000, and the APRC is 3.5 per cent.
Buy-to-let mortgages with 80 per cent LTV
With 80 per cent LTV you could look at the Hanley Economic Building Society, who are offering an initial rate of 3.69 per cent, fixed for three years. Apparently, there are no product fees, although it’s worth checking the small print. The APRC is 4.7 per cent.
Buy-to-let mortgages with 85 per cent or 90 per cent LTV
With a loan-to-value ratio any higher than 80 per cent, you’re likely to struggle to find a buy-to-let mortgage. You could try speaking to a mortgage broker as they have access to some specialist products that are not sold directly to consumers.
The best buy-to-let mortgages for limited companies
Recent figures show that more and more landlords are buying property through a limited company in an effort to sidestep recent tax changes.
Not all providers offer buy-to-let mortgages to limited company borrowers, but the increase in demand has meant that more products are entering the market. To find the best buy-to-let mortgage for your limited company, you may be best off speaking to a mortgage broker.
Information was accurate at the time of writing. We’ve only compared a few of the deals available, using a single borrowing scenario and making certain assumptions. Remember that other providers are available and the best deal for you will depend on your individual circumstances. Please do your own research, and seek professional advice if necessary.