The mortgage that will transform buy-to-let!

Now landlords only need a 15% deposit.

A step change occurred this month in the buy-to-let mortgage market with the launch of one product that has created a buzz in landlord circles.

The mortgage doesn’t come with a particularly cheap rate, the fee is pretty steep and most borrowers will not have heard of the lender.

So what’s so special about it?

All the way to 85%

Kensington's new deal is available up to 85% of the property’s value. This is the only product of its kind on the market with the minimum deposit previously required being 20% -- and only a handful of deals available at this level. In practice the vast majority of buy-to-let deals require at least 25% upfront and often a lot more.

But why is it so great that this new deal only requires 15%?

Many landlords have become mortgage prisoners over the last few years, finding that they simply don’t have the required equity to move their mortgage, or to take out a new one. Before this new mortgage, anyone with less than 20% equity in their property could not remortgage to a new deal.

In the last two years this may not have been too much of a problem, as lenders' reversionary rates, such as standard variable rates or long-term trackers, were so low that it was a no brainer to stay on them anyway. In 2011 though it’s a different story and staying on your lender’s SVR is not quite so appealing.

Rate rise on the cards

The threat of an imminent Base Rate rise, which most economists expect to happen this year, means that any landlord sitting on a variable rate is left exposed to rising monthly repayments.

Being in that position and knowing you do not have the equity to remortgage is a scary prospect because if rates did start to rise you would simply have to accept the higher repayments, whether or not your rental income covered them.

A buy-to-let mortgage that accepts just 15% equity takes more people out of this ‘mortgage prisoner’ bracket and gives them the option of moving to a new fixed rate deal.

Time to expand?

In addition, with house prices stuttering many landlords have been left frustrated at not being able to take advantage of market conditions. It’s the perfect time to bag a bargain property and tenant demand is currently rocketing, but mortgage criteria have been so tight that only cash-rich purchasers had a chance of buying.

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Now the introduction of a mortgage available to those with just a 15% means that more people will be able to expand their portfolio. This is particularly important given the enormous burden being placed on the private rented sector by the Government, especially in light of cuts to social housing provision.

But what about the actual mortgage? Is it any good?

The deal in detail

The mortgage on offer by Kensington is a two-year fixed rate at 5.99%. This is not exactly a cheap rate, although as the only deal available up to 85% LTV there isn’t anything to compare it to.

It’s worth noting though that there are many other buy-to-let mortgages at a similar level that require a far greater deposit, so it’s not uber-expensive either.

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However, it’s not just the rate that’s on the high side -- the 2.5% fee is pretty eye-watering too, although unfortunately not unusual in today’s buy-to-let sector.

To be honest, the rate and the fee really aren’t the point with such generous lending criteria. In addition to only requiring a 15% deposit the minimum rental cover has been reduced by Kensington from 125% to 120%. For example if your monthly mortgage payments are £1,000 your rent will need to be at least £1,200 to qualify.

This is another example of how the flexible criteria on this deal will allow more landlords to take advantage of it.

Perhaps most importantly, the launch of this mortgage should hopefully lead to more lenders extending their maximum LTVs to 85%. Landlords need this flexibility and with more lenders planning to launch into the sector in 2011, including Yorkshire Building Society and Santander, it looks like competition is finally beginning to really hot up.

Below are some of the best buy-to-let deals on the market right now.

20 top fixed rates

15 fab variable deals

*London Interbank Offered Rate

More: Find a competitive mortgage | Get ready for mortgage rate rises |The time is ripe for buy-to-let

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At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article. 

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

Your home or property may be repossessed if you do not keep up repayments on your mortgage.