Getting a mortgage that suits your needs as a landlord is incredibly important if you want to maximise your return on investment. In this article, Matt Stevens from The Mortgage Genie, who offer a brokerage service for buy-to-let mortgages, offers his top five tips for finding the right deal.
Are you thinking about buying a property to rent out? Since the 1980s, the buy-to-let market has been providing additional income to landlords, and with around one quarter of UK households expected to rent privately by 2021 (Knight Frank), it looks like demand will only getting higher.
Once you’ve found the right property to rent out, you will need to navigate the buy-to-let mortgage market to secure a deal that will not only be affordable, but will help to provide a return on investment. However, the process of finding the right product and applying can prove to be a challenge — especially for new landlords. So, that’s why I’ve put together my top five tips for doing exactly that.
Do your research before taking the plunge
Though you’ve probably successfully applied for a residential mortgage or two in the past, it pays to familiarise yourself with the ins and outs of the buy-to-let mortgage market before applying. Doing some research into what to expect will mean there are no surprises when the time comes to sit down and complete your paperwork.
While buy-to-let deals have much in common with standard home loans, there are some big differences. For one, the deposits you’re expected to pay upfront are larger: 25% of the property value is usually minimum, running all the way up to 40%.
Another difference is in the way that buy-to-let mortgages are repaid. Most are interest-only, where you only pay the interest each month and the original debt is cleared when the property is sold. This differs from a regular mortgage where you are able to repay some of the original loan. The result is a debt that remains static until you decide to sell.
Know how much rent you could potentially earn
A bank or building society will also assess a buy-to-let mortgage differently to how they would a regular mortgage. Rather than looking at your income, they look at the expected rental income of the property, with the majority of lenders wanting an annual rental income of 125% of your annual interest payments. This makes it crucial to know what rent you could potentially earn so that you can apply for the right mortgage.
To find out how much annual rental income you could be in line to earn, you need to research the market in the area of your desired property. Look at local listings for rentals and see what landlords are charging for similar houses or flats and use this information to work out if you will be able to afford to pay back 125% of the interest on any mortgage deal you are considering. If you can’t afford to cover the cost, you will likely be turned down.
Look at the bigger picture when choosing a product
When you are considering which buy-to-let mortgage product to choose, it’s easy to get distracted by rates, deposits, and fees, rather than looking at the long-term cost. Chances are that you will be planning to keep your property for quite a few years, so it pays to look at the Annual Percentage Rate of Charge (APRC). This tells you how much your mortgage would cost you each year if you keep the property for the duration of the term, including the main rate and any introductory rates or fees.
Any mortgage provider or advisor has to give you the APRC as part of a quote, as required by law. It will give you a look at the bigger picture when it comes to a particular mortgage product and will help you pick one that is beneficial overall, rather than in the short-term. However, it is worth remembering that you may find a better deal down the line and choose to remortgage, so the APRC is not the be-all and end-all of your financial future, but rather a snapshot of how it could look.
Seek professional advice
When you are entering the buy-to-let mortgage market, it can be beneficial to have someone who knows it well to help you find the right deal. That’s why you should consider employing the services of a mortgage broker who can work with you to create a shortlist and get your application together.
A good broker will sit you down and find out about your personal circumstances and what you want from your buy-to-let. And, many brokers also have access to exclusive deals and specialist lenders that aren’t available to people who decide to go it alone.
Keep an eye on your mortgage rate
Finding a good buy-to-let mortgage doesn’t end when you sign the agreement on your contract. You may see a better deal available further down the road that will provide better value to you or suit a change in your financial circumstances, and it’s important to remember you can remortgage to get that deal.
Therefore, it’s wise to keep an eye on your current deal and the mortgage market to see if you could switch to a better rate. You should keep a record of when any introductory rate ends, as this will often end up with you being switched to a higher interest rate. As a general rule, it’s worth reviewing the status on your mortgage and the state of the market on an annual basis to make sure you don’t miss out on an opportunity.
I hope these five tips will help you to get the best possible buy-to-let mortgage deal. Keep them in mind and you’ll be in the best position you can be to enter the market.