How to get the best buy-to-let deal

Which lenders will accept the smallest deposit and who offers the keenest rates?

The buy-to-let sector has taken a battering in the last two years, but there have been some recent green shoots in the shape of falling arrears and increased lending. Yields are also high and while capital values have fallen, the recent stabilisation of house prices benefits landlords as much as anyone.

But one of the biggest challenges for buy-to-let borrowers has been the significant tightening of mortgage criteria since late 2007, and this has had the greatest impact on those who borrowed when lending was at its most generous.

Tightening the screws

As lenders contracted their business volumes and constricted their criteria from late 2007 onwards many landlords found that remortgaging was impossible - the goalposts within which they initially borrowed had shifted.

Now no one would offer them a mortgage if they had less than 25% equity (falling house prices pushed many into this category) or if their rental income didn't stack up to at least 125% of their monthly mortgage payments.

But have things loosened up a bit in the buy-to-let sector over the summer, or we still seeing landlords struggle to find refinance options?

We look at three of the main considerations for buy-to-let borrowers - loan-to-value ratios, minimum rental cover requirements and that all-important rate.

All about the deposit

The amount of deposit or equity you can muster is a key factor for many landlords, as it could make or break you getting a good deal.

Of course, in a more competitive market many landlords would prefer to tie up less capital on their investment, and increase their total return. But big deposits are the name of the game in 2009.

In 2007 minimum deposits of 15% were commonplace and a handful of lenders allowed borrowers to put just 10% down. Not any more.

On average most buy-to-let borrowers need to put down at least 25% and the best deals are reserved for those with at least 40% upfront. This situation has softened slightly in the residential market with 25% being enough for some of the best rates, but in the buy-to-let market the 60% LTV tier is still where the keenest deals are found.

In other words, criteria is not relaxing.

New build blues

It's even tighter in the new build arena where you will have to find more than 25% just to get any deal, let alone the best ones.

Northern Rock and Nationwide subsidiary The Mortgage Works will lend up to 70% to borrowers buying a new build house.

If you are buying a new build flat you will only be able to borrow up to a maximum of 65% of the property's value -- that's from BM Solutions (part of Lloyds Banking Group), The Mortgage Works, Cheltenham & Gloucester (C&G) or NatWest.

If you know of a lender that will go higher on new build buy-to-let, please post below.

In other words you need a lot of capital in order to buy a property to let, and you need significant equity in order to remortgage. Those existing borrowers who don't have such equity are forced to pay their lender's standard variable rate for the foreseeable future.

Rental arithmetic

When lenders work out how much they will lend a buy-to-let borrower they don't usually take into account your income. After all that might be going to pay off your own residential mortgage.

Instead they look at the expected rental income of the property and ensure it will cover the monthly remortgage payments comfortably, including a buffer to cover void periods or essential maintenance.

This is now at least 125% of mortgage repayments, but in the boom times minimum rental cover dropped to 100% of mortgage repayments - in other words, no buffer.

So in the current market, if your mortgage repayments work out a £1,000 a month, the lender will require you to have an expected rental income of £1,250 or more in order to lend the mortgage.

But remember, it's not just the headline minimum rental cover quoted that determines how much a landlord can borrow in relation to their expected rental income. The interest rate is a vital component here too as it establishes what the monthly repayments are.

So a slightly higher minimum rental cover with a low interest rate could actually enable a landlord to borrow more than a low minimum rental cover on a higher rate deal.

How it works

Say you wanted to borrow £150,000 (on an interest-only basis) to buy a property that had an expected monthly rental income of £700.

Deal A has a minimum rental cover of 125% of monthly repayments and an interest rate of 3.99%.

Deal B has lower minimum rental cover of 110% of monthly repayments and a rate of 5.50%.

With Deal A your monthly repayments would be £499 and therefore your required minimum rental income would be £624 - comfortably within the £700 you expect to get.

With Deal B your monthly repayments would be £688 and even with the lower minimum rental income percentage of 110% you would still need to be getting £756. In other words you would not be eligible for this deal.

So although minimum rental cover is an important factor, it needs to be taken in conjunction with the rates available. Don't assume that the lowest minimum rental cover will always enable you to borrow more.

The best buy-to-let rates

Finally the all-important rate.

Below are some of the most competitive buy-to-let mortgages on the market, split into two categories - those which require 40% upfront and those which demand just 25%.

Up to 60% LTV

Up to 75% LTV

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