Brian Murphy, head of lending at Mortgage Advice Bureau
Whether you are new to investing in property or are considering remortgaging your portfolio, it is helpful to consider how lenders view property investment from a borrowing perspective and to understand the different criteria mortgage providers apply when setting their lending policies.
Loan-to-value (LTV) ratios and deposit levels
If a property is valued at £150,000 and you have a 25 per cent deposit (£37,500), then the LTV ratio is 75 per cent, i.e. the amount being loaned as a percentage of the property value.
When buying a property as a home, LTV ratios can be as high as 95 per cent, so only a 5 per cent deposit is required. When investing in a property, Buy-to-Let mortgages are likely to require a higher level of deposit, for example, 15 per cent or 25 per cent. Typically, the higher the deposit, the greater the number of mortgage products there will be to choose from - and the interest rates may also be lower.
For landlords who have a portfolio of properties, specialist lenders may set their LTV ratios ‘across’ your portfolio. For example, if their criterion is a minimum of 25 per cent deposit, this could be met by financing two properties at different LTVs:
Value Mortgage Equity LTV
Property one: £150,000 £100,000 £50,000 67%
Property two: £200,000 £162,500 £37,500 81%
Total: £350,000 £262,500 £87,500 75%
Mortgage interest rates
This is the amount of interest you pay on the mortgage you take out to buy an investment property. Rates vary from time to time, depending on the level at which the Bank of England sets their bank rate. Historically, the lower the Bank of England bank rate, the lower the mortgage interest rate.
Rates can also vary according to how much lenders want the business. The more interested the lender is in attracting borrowing for investing in residential property, the more competitively they tend to set their rates.
Finally, the rate depends on how much money the lender has to lend and at what price they can borrow from the markets - if money is available. Currently, the Bank of England bank rate is at 0.5 per cent (as at June 2015) and lenders are keen to compete for Buy-to-Let mortgage business, so interest rates tend to be quite competitive.
When committing to a mortgage, there are costs involved, from booking and administration fees to valuation costs, the total of which can range from a few hundred pounds to thousands of pounds. It is worthwhile considering these in a ‘costs versus value’ manner, rather than simply choosing a mortgage with the lowest rate. Depending on your investment strategy and financial objectives, it may be worth paying higher fees for a mortgage product that suits your requirements.
Mortgage Advice Bureau brokers can provide advice about all of the costs related to securing a Buy-to-Let mortgage and the financing of an investment property over the long and short term, helping you compare one mortgage product to another.
Rental income versus mortgage payments
One of the key criteria lenders consider before making a mortgage offer is whether the investment property is viable from a lettings perspective. One way to do this is to calculate whether the monthly rental income is significantly higher than the cost of the mortgage repayment.
Although percentages can vary, lenders look for the monthly rental income to be approximately 125 per cent of the mortgage repayment amount, which they will want verified by a qualified surveyor. For example, if the rental income was £750 per month, a lender may offer a mortgage with a monthly repayment of £600 per month. On an interest-only basis, at a 5 per cent interest rate, this would translate into a mortgage offer of up to £144,000 on a property. Assuming a 25 per cent deposit requirement, this would allow the purchase of an investment property of up to £192,000 in value.
It is possible to borrow at lower rental income versus mortgage payment, such as 115 per cent, while some lenders may prefer to see a higher ratio at 130 per cent.
It is important to know that even if a property’s rental income is 125 per cent of the mortgage repayment, it does not always mean you will receive net income from your investment.
Maintenance and other ongoing costs need to be paid for, so check whether any property you consider buying will generate at least enough excess rental income to cover current and future repairs as well as the mortgage costs.
Different ways to earn income from property investment
When investing in property, there are different ways to earn rental income, depending how the property is let and to what type of tenant, and this may influence the mortgage you borrow. For example, there are some lenders who will lend on high-rise flats, while others do not; some investors want to let a whole property, while others will want to rent rooms individually. For some investors, a mortgage may initially be required to renovate a property, before letting it long term.
Each of these scenarios will have different implications for capital investment, rental income and ongoing costs, and the type of investment you make can determine which mortgage lender and product is available to you and most suited to those specific circumstances.
When choosing a mortgage for property investment, it is about much more than simply comparing the interest rate. Some lenders may even limit the number of Buy-to-Let mortgages they will provide to one person. If you are only planning to invest in one property to let, this may not be a consideration, but if you plan to build or already invest in a large portfolio, particular lenders may be more suitable.
The role of a good mortgage broker is to search the whole of the market to find the most suitable mortgage options to fund your property purchase or remortgage, according to your investment objectives. A professional mortgage broker will also take into account the lenders and mortgage products different lending criteria.
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There is no guarantee that it will be possible to arrange continuous letting of the property, nor that rental income will be sufficient to meet the cost of the mortgage.
Your property may be repossessed if you do not keep up repayments on your mortgage.
There will be a fee for mortgage advice. The actual amount you pay will depend upon your circumstances. The fee is up to 1 per cent but a typical fee is 0.3 per cent of the amount borrowed.