Getting the Best Buy to Let Mortgage Deal for You
In this blog post, private rented sector expert, David Lawrenson of www.LettingFocus.com looks at how to get the most suitable mortgage deal.
I’m often somewhat surprised by the fuss folks make about getting a mortgage and some of the wrong decisions they make too. To us it seems pretty simple.
The first question to ask is for how long you expect to own the property – as usually that links to the length of mortgage you should be seeking and any special features it may have. (Some mortgages are portable between properties (for a fee usually) but let’s keep it simple).
Once you know how long you will own the property, then you can look at the best deals available. I always start by looking at comparison sites first. I tend to use MoneyFacts as a start point, but there are lots of other sites you can use.
Set Up Mortgage Fees
The first things to look at are what the up front fees are, what the interest rate is and if there is any Exit (or Redemption) fees.
The mortgage application (or Arrangement Fee) is fairly straightforward, is usually payable when the property transaction completes and can usually be added to the mortgage loan.
In addition, find out about initial Booking Fees and fees for Mortgage Valuations (as these can vary a lot). Usually, information on these is not listed at price comparison sites and you usually have to go to the lender to find this or ask a broker (if you use one).
Initial Mortgage Rates and Reversionary Mortgage Rates
For mortgage interest rates, you should be looking at both any initial rate (if applicable and which may last for 1 to 5 years) as well as finding out what rate you will be paying when the initial rate expires and for the rest of the mortgage term.
This latter rate is often referred to as the lender’s Standard Variable Rate (SVR) or you may see it referred to as the “Reversionary Rate” or even more simply, the “Go To” rate.
Long term readers of this blog will know that I hate SVRs that are not linked to the Bank of England’s (BOE) base rate as in my opinion they act like “an open cheque book” to lenders to hike the rate up at any time they feel like.
Indeed, in the last 26 years as a portfolio landlord, I have never taken out a single mortgage that was not linked to the BOE rate. This has served me well as today I enjoy some buy to let mortgage lifetime reversionary rates of 0.7% over base. It’s nice to know that people like me are costing the daft banks that did the loans a fortune and kind of makes up for their sins over recent years!
If you get trapped on an uncompetitive SVR you will have to consider remortgaging again in the future, for which there be another round of costs. And it could be that mortgage finance in the future will be even more restrictive than it is today, so you may find no deals are available, especially if you have a high level of borrowing – thus leaving you an effective mortgage prisoner – stuck on a high SVR with nowhere to go.
Exit and Redemption Fees
It’s worth asking about Exit Fees, especially if there are any fees linked to Early Redemption of the mortgage. Find out for what period of time these will apply for and be aware that some may extend for a period of time after any initial special mortgage interest rate has ended.
The more you borrow, the higher your mortgage Loan to Value (LTV) and the higher your mortgage interest rate will inevitably be too.
The cheapest mortgage interest rates for landlord buyers come in at 60 or 65% LTV but that requires you to put in sizeable a chunk of deposit or “equity” – thus freezing up capital that could otherwise be used to make other property investments.
Rent to Interest Ratio and LTVs
LTV on a buy to let mortgage is also impacted by the “Rent to Interest Ratio”. Most lenders look for this to be 1.25 times or 1.3 times the interest rate (and be aware that the interest rate the lenders uses for the calculation will tend to be the higher SVR, rather than any “initial pay rate”.)
If the valuer’s assessment of achievable rent doesn’t come in high enough, the amount of mortgage offered by a lender may well fall short of what the borrower hoped, thus reducing the LTV and requiring the borrower to put in more precious equity.
These days, borrowers need to have a squeaky clean credit history and have to be prepared to furnish a lender with lots of documentation, especially if no current banking or asset management relationship with the lender exists.
It can be worth approaching a good mortgage broker who will know the ins and outs of each lenders particular criterion – what sort of properties and “situations” they will lend on, what type of borrower they like or don’t like etc. They can also sometimes get applications approved that the borrower acting on their own cannot and for higher levels of borrowings they will also know about deals from merchant banks (who do not list on price comparison sites).
Most brokers charge a fee for their services which is addition to the “Procuration Fee” they receive from a lender for setting up the mortgage.
The amount they charge borrowers depends on the type of mortgage, the amount of work involved in setting it up and the potential for other finance and insurance related work from the borrower.
Mortgage Lenders Sometimes Appear Illogical
Be prepared to be frustrated. In the buy to let space, many lenders have rather unusual approaches. For example, many experienced landlords with millions of pounds in equity in their property portfolio, low LTVs and years of experience are often rejected by lenders who would seem to prefer to lend at high LTVs to novice landlords with no experience at all.
If it’s any consolation we can often make little sense of some lenders’ strategies and ways of thinking either.
If you need help with getting a mortgage, please send us an email and we can put you in touch with a broker.
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