Save money by choosing the right buy to let mortgage
In this post we look at how landlords can save money by finding the best buy to let mortgage and factors landlords need to consider.
Choosing the best buy to let mortgage deal from the hundreds on offer is a hard task for even those most experienced landlords.
To help pick the cheapest buy to let loan, borrowers need to know their fixed rates from their trackers and the pitfalls to avoid.
This guide explains the jargon and will show any borrower, from a first time investor to a seasoned professional, how to navigate the buy to let mortgage maze and save money.
How do buy to let mortgages work?
Buy to let mortgages differ from ordinary home loans as lending is based on the value and rental income generated by a letting property rather than the earnings of the borrower.
Typically, a borrower has to put down a deposit from 15% to 40% of the property value, so the first step is working out the likely value of an investment property from the money available as a deposit.
Don’t forget to keep aside some extra cash to pay for legal fees and stamp duty.
Mortgage Loan to value
Loan to value or LTV is the amount of money a lender is prepared to advance against the value of a buy to let home.
The value is not necessarily what the borrower is willing to pay, but is more likely the lower of the purchase price or the value set by a surveyor.
LTV is a percentage of the value of a property, so 75% LTV means a lender will advance up to 75% of the property value.
Generally, the mortgage interest rate is cheaper for borrowers who put more cash down as a deposit. The lender sees a lower LTV as less risk, so a 60% LTV deal is cheaper than an 80% LTV because the borrower is bearing more of the risk.
If you want a 75% LTV mortgage on a home costing £180,000, then you need a 25% deposit, which is £45,000. The mortgage on that property would be £135,000.
Buy to let insurance: Rent Cover
Whether the lender is ready to advance a buy to let mortgage of £135,000 on our average priced homes depends on two factors –
- The surveyor’s valuation confirming the price
- If the rent a tenant pays covers the monthly mortgage repayment
Rent cover determines the second point.
Rent cover is an affordability test and each lender has a formula for the calculation.
Most formulas follow the same principle – demanding the rent cover calculation comes to at least 125% or 130% of the monthly rent at interest charged at the lender’s standard variable rate. For this calculation, assume the rate is 4%.
To meet the rent cover test for a £135,000 buy to let mortgage multiply the mortgage amount by the standard variable rate and divide by 12 to find the monthly rent needed to meet the test.
- £135,000 x 5% = £6,750
- £6,750 divided by 12 = £562.50
So, providing the rent paid by the tenant is £562 a month or more, the mortgage passes the rent cover test.
Should the rent fall below £562, a month, the lender will adjust the advance down and the amount of deposit rises.
If the purchase price was £190,000 and the rent £562 a month, then the mortgage would still be £135,000, but the deposit would rise to £55,000, giving an LTV of 71%.
Compare buy to let mortgages
The first rule is ignore the headline rate offered by the lender.
For example, if one lender is offering a 3.25% mortgage fixed for three years with a £150 booking fee and a £995 lending fee, the cost over the fixed rate term is:
- £135,000 x 3.25% = £4,387.50 a year
- Multiply this by three for the cost over the term, which is £13,162.50
- Add the booking fee and lending fee, which is £150 + £995 = £1,145
- Now add the mortgage interest over the term to the total fees, which is £13,162.50 + £1,145, giving £14,307.
You can divide this by 36 to give a monthly cost over the fixed rate term - £14,307 divided by 36 = £397.50
Follow the same calculation for each buy to let mortgage you are considering and make sure sums are over the same term. Whichever monthly figure is lowest is the cheapest mortgage.
Shopping for a buy to let mortgage
Not all lenders list their buy to let mortgages on every comparison site and some only accept direct applications or applications through a mortgage broker. Some lenders pay comparison sites to list their products, so ‘best buy’ deals might be from a limited list of products.
To find the best deal, pick from two or three comparison sites and check the lender’s own web sites to see if they have any special offers for direct customers.
For landlords remortgaging, phone the lender and ask if they have special rates for existing customers.