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Tue 06 Nov 2018

To get the most out of your rental portfolio, you need to have the right buy-to-let mortgage for your specific circumstances.

But what are the different buy-to-let mortgages on offer and what do most landlords opt for?

What is a buy-to-let mortgage?

Anyone buying a property to rent it out is likely to need a buy-to-let mortgage. Typically, they are more costly than a standard residential mortgage because they are deemed higher risk. Many banks and building societies offer buy-to-let mortgages, while there are also more niche lenders who focus entirely on this market.

A buy-to-let mortgage requires a larger deposit than a residential one, with at least 25% of the purchase price usually needed, while many of the best buy-to-let mortgage deals on the market require a 40% deposit.

According to data from comparison website MoneySuperMarket, the average deposit for a buy-to-let mortgage in the 2016/17 financial year stood at more than £62,000 – over double that of a first-time buyer deposit.

Meanwhile, the average loan to value (LTV) for a buy-to-let purchase is around 69%, while the average cost of a buy-to-let home in the UK is just over £183,000.

There are typically a range of mortgage deals on the market, which include fixed rate and tracker packages. While a large portion of landlords opt for a fixed rate deal for the consistency and security this provides, it’s often the case that tracker mortgages – which track the base interest rate and go up and down in value accordingly – are cheaper. However, they are more risky, with possible fluctuations in mortgage payments depending on various political and economic factors.

Average mortgage repayments for a buy-to-let mortgage are typically much lower – less than half that of the average first-time buyer, in fact. The majority of the time, landlords with buy-to-let mortgages will expect the monthly rent they receive to cover the monthly mortgage repayments they owe, but the potential for void periods, tenants in rent arrears or other issues with rent collection make this kind of mortgage higher risk to the lender.

It’s important to remember, too, that the majority of buy-to-let mortgages do not follow a repayment model, but an interest-only one. This means landlords only repay interest each month, with the mortgage debt itself cleared when the property is sold. While monthly repayments are lower, landlords must rely on the fact that they have the necessary capital to repay off the mortgage in one lump sum – something that could prove trickier if house prices are stagnant or falling.

Previously, landlords could benefit from offsetting a percentage of the mortgage interest against their tax bill, but this is slowly being phased out (down to 25% in April 2019 and 0% in April 2020).

Which type of mortgage is best?

Fixed-rate – offers stability, security and low monthly mortgage repayments if you happen to get a good deal (this depends on how competitive the rates being offered by mortgage provides are when you are borrowing). Typically they are for two, three or five years. In the same way as a residential mortgage, once the fixed term ends, you are moved on to your lender’s standard variable rate mortgage, which can often mean higher costs. This is the time to think about remortgaging to get a better deal.

Tracker – the cost of a tracker mortgage depends on the base interest rate. If this rate rises, as it did in August this year from 0.5% to 0.75%, monthly mortgage repayments increase with it. While the same is true if the opposite happens and interest rates fall. Interest rates are expected to rise again (by 0.25% each time) in 2019 and 2020, which will increase the monthly costs for those on tracker mortgages. However, these rises are modest and interest rates are still at historically low rates – which could still make this type of mortgage appealing to those willing to put up with a bit more unpredictability.

Discounter variable – a discounted variable rate mortgage is one that is always set below a lender’s standard variable rate (or SVR). So, for example, if a lender’s SVR is set at 6%, the discounted variable rate would typically be 2% lower. In most cases a discounted mortgage will last for two years before you are moved on to your provider’s SVR. It’s worth keeping an eye out for this type of mortgage – but, like with any mortgage, it comes with possible pros and cons.

What other costs do you need to be aware of?

When it comes to letting property, budgeting is absolutely crucial to ensure you don’t leave yourself in financial bother. It’s never wise to overstretch yourself financially, or take too many risks, as this is only likely to cost you in the long-term.

Make sure you know what you can afford before you seek out a buy-to-let mortgage, and this includes factoring in the additional costs that come with renting out homes – including letting agent fees (a good, reliable letting agent will make the process smooth and easy and will ensure you get the most from your portfolio), landlord’s insurance, tax on rental income, maintenance costs and rent insurance, among other things.

Taking out a buy-to-let mortgage also comes with a number of potential costs, including application fees, broker fees, booking fees, legal fees, valuation fees and arrangement fees.

This is not to put people off buy-to-let – the rewards can be considerable if you invest in the right areas and target your homes strategically to the right kind of tenants – but just to raise awareness of the costs involved.

Strong rental yields and capital gains often make buy-to-let a very lucrative investment – especially in high-demand areas where supply doesn’t keep pace – but you need to make sure you have a sound budgeting strategy in place and work closely with an experienced letting agent to get the most from your homes. Equally, having the right mortgage is crucial.

The above is an initial guide for your reference. Before taking out a buy-to-let mortgage, it is vitally important that you consult the advice of a professional mortgage adviser before making any commitments.  

At Letting Solutions, West Lothian’s first dedicated lettings agency, we can help you get the most from your rental properties.

To find out more, please get in touch with us on 01506 425693. We also offer free and instant online valuations to give you an idea of how much your rental home is currently worth.