Funding your investment
Buy to let mortgage
Buy to Let mortgages have been created for the residential investment market and are unique in that you are given specific permission to let the property.
The affordability for a mortgage on your own property is based on a multiple of your income, whereas the affordability for a BTL mortgage is normally based on the anticipated rent exceeding the mortgage payment by a certain margin, typically 25%.
Most lenders now offer BTL mortgages, and some specialise in funding for portfolio clients. This amount of competition in the market means you will be offered a wide range and choice of rates, such as fixed rates and discounts, and the rates won‘t be much higher than those for your main residence.
Cash Purchase Example
Invest £50,000 - Buy 1 Property
After just 3 years:-
Portfolio value - £62,986 Profit from house inflation (growth) - £12,986 Profit from rent (yield) - £11,700 Combined capital return - 49%
Gearing Up Example
Invest £50,000 - Buy 6 Properties (mortgaged)
After just 3 years:-
Portfolio value - £377,913 Profit from house inflation (growth) - £77,913 Profit from rent (yield) - £2,715 Combined capital return - 161%
Cash
If you are in the fortunate position to use cash for the whole of the purchase, you may wish to consider if this is the best option.
Borrowing part of the money for the purchase (known as gearing up your investment) can increase the net yield on the investment as your interest payments can be offset against your profit to reduce your tax bill.
Using gearing can also increase the net return on your initial investment by spreading it over more high yielding properties.
Equity
Many people start their property portfolio by raising equity from their own home or other assets. This usually involves re-mortgaging at a higher loan-to-value and quite often a better interest rate. The interest payments for any money raised this way that is used for property purchase can be offset against your profit for tax purposes whether it is used to fund just one purchase outright or as the deposit money for several purchases.
Personal loan - these are now readily available up to £25,000 and at very low interest rates.
Secured loan - these are now available from £25,000 to £150,000, the same as a personal loan, but the lender charges a security over property or land that you own.
The balance transfer trick - (clever credit card tricks) The method here is to take out a credit card with one of the major credit card companies such as MBNA that provides you with credit card cheques.
Go for the highest credit limit you can, £10,000 is very feasible. They usually give you the first 6 months interest free (you must make provision to make the minimum payment). Then just as the interest free period expires apply for a new credit card with a different company offering interest free balance transfers.
Apply for the balance transfer and when it is complete cancel the old card. You could always re-use the old card to buy another property - this depends on your attitude to risk.
As your property approaches completion use the credit card cheques to fund the deposit, fees, etc.
What are the costs of a BTL mortgage?
Deposit
As an absolute minimum a deposit of 25% of the purchase price will be required. With this you will still have a choice of competitive lenders. A higher deposit will open up more lenders to choose from and potentially better rates and is also essential for certain property types, such as low valued property.
Mortgage lender fees
Generally all lenders have some sort of fee for arranging a mortgage. If this is structured as an arrangement fee, it is usually payable on completion or can be added to the borrowing, if it is structured as a booking fee it is usually payable upfront upon application, and watch as is sometimes non-refundable if you do not proceed.
Typical fees range from £295 up to 1% of the purchase price.
Legal fees
In Scotland RJM Properties will provide one of our approved Scottish solicitors, typically they charge approximately £550. Other legal fees will include Land Registry and Searches which will be detailed on the solicitor’s quote.
Mortgage Broker fees
Although there are brokers out there who do not charge a fee, we always recommend using a broker that specialises in the buy-to-let market. Paying a small fee to a good broker usually pays for itself since they use their expertise to select the best mortgage product for you and your investment.
Future borrowing
Many lenders will allow you to go back to them some time after the mortgage has completed and request further borrowing. You may only be able to do this if the value has improved, say after renovation and if the rent is still sufficient to cover the increased mortgage payments. If this is key to your strategy, watch out for lenders with rules that may prohibit you form additional borrowing for the first 6 months of mortgage. For full flexibility, it would be worth ensuring the initial mortgage is on a rate with no penalties, so that you could freely move to another lender if your existing one cannot accommodate your requirements.
Re-mortgages
Where your additional borrowing requirements cannot be met by your existing lender or perhaps where you wish to try and secure a better rate, it may be possible to re-mortgage. This means you will move your mortgage from the existing lender to an alternative. As this is a legal transaction, a new survey will be required and a solicitor will need to complete the legal work. There will generally no stamp duty to pay again; unless you are changing the names the mortgage and property are held in. In this case you should seek specific legal and taxation advice.
Lettable condition
BTL mortgages are generally only available for properties that are in a ‘lettable’ condition. This means they will need to have a kitchen, a bathroom, reasonable roof and windows etc. Even if the property is of a lower standard than you would like, providing the lenders surveyor confirms it is ‘lettable’ you will able to arrange a BTL mortgage up to 75% of the purchase price. The surveyor may still recommend retention until certain works, often damp proofing, is carried out.
Difficult Property
From a mortgage point of view the following property can be more difficult to arrange BTL finance for:
Flats above pubs, hairdressers or hot food outlets Low values (loans under £25,001) Run down properties Studio flats In the main there fewer lenders available as some lenders view these types of properties as higher risk or commercial propositions. In some cases you will be required to put down more than the minimum deposit.
Renovation
Many of our investors look towards property that requires renovation to build additional equity. If you have the cash available you could simply purchase the property outright and look to raise finance on the property when the renovations are complete.
Alternative finance
However if the property is deemed in a currently 'un-lettable' condition a BTL mortgage will not be an option alternative schemes are available, but are slightly different from standard Buy to Let mortgages. Typically only 70% is available although you may also be able to borrow 70% of the costs of renovation.
Calculating Affordability
Rental calculation methods
A Buy to Let mortgage, in contrast to a residential mortgage, is not normally calculated on an individual’s ability to pay, rather it is based on the rent covering the mortgage payment by a certain margin. Typically the mortgage payment is calculated on an interest only basis and in order to satisfy the lender’s criteria, the rent needs to be 125% of this mortgage payment.
The interest rate that the mortgage payment is based on however, varies greatly from lender to lender. For example, you may have been able to secure a lower initial rate or perhaps a fixed rate for the mortgage and with some lenders the calculation will be based on the rate you select. Other lenders however take an alternative view.
As your rate is only an initial deal, some will expect the rent to be 125% above a mortgage payment based on their longer term ‘variable’ rate or a ‘notional’ rate that they believe represents a longer term view.
An example of the calculation method is given below:
Property purchase price £60000
Mortgage lending 85% £51000
Discounted initial rate 5.34%
Monthly mortgage payment £226.95
Calculation based on 125%
Rent required £283.69
