Tim Wilson, the head mortgage broker of lovemoney.com, reveals his top tips on how to pick the right buy-to-let mortgage lender.
As a broker here at lovemoney.com, I get a lot of people asking me about the buy-to-let market.
Of course, their number one question at the moment is: Is now the right time to buy?
Well, personally, I believe there is never a wrong time to buy, but there is always a right time to sell.
As long as you're looking at this as a long term investment rather than a short term, then I believe you can still pick up a really good investment property now if you look hard enough.
But due to the credit crunch, one of the biggest problems that new investors will come up against nowadays is getting a buy-to-let mortgage. Often, I'm asked: Which is the best lender and what type of mortgage should I go for? How big a deposit do I need? Will I be eligible for the top deals?
Here are my top tips for getting the best buy-to-let deal from the right buy-to-let lender.
The buy to let market
The buy-to-let market is one of the markets that has really changed since the credit crunch started - and not for the better. You need bigger deposits now: typically 25% to 30% of the property's value. There are fewer types of property that lenders will agree to will lend on. And worst of all, the fees now are absolutely huge, with some of the biggest lenders charging 3% of the sum you want to borrow.
But you can still get a good deal if you pick the right type of property. Check to see what the construction type is. The lender will need to know if it standard or whether it is non-standard (i.e. whether it is timber framed or concrete, vs. standard brick).
You tend to find that the more complicated or unusual the property construction, the less lenders will allow to mortgage. But don't despair - a good tip on non-standard construction property is to find out from the seller who their existing mortgage is with. That way, at least you know whether it's possible to get a mortgage and it might also give you a heads up to where to start!
Similarly, it pays to avoid new build flats. At present, these properties are taking the brunt of the decline in lending as lenders see them as higher risk -since a lot of them are being down-valued. Indeed, some lenders flatly refuse to even consider lending on them, so it's worth doing some research or checking with a broker which lender to go for, before you apply for a mortgage on a new build flat.
How a buy-to-let mortgage works
Once you've picked your property, you need to know how a buy to let deal actually works. It's not the same as a normal residential mortgage, where the lender will look at whether you can afford to borrow the mortgage on your income (taking into account your other monthly commitments).
With a buy-to-let mortgage, it's not about you at all, it's about the property. So the decision to lend is not based on your personal income, it's based on the property's income. In other words, it is all worked out by looking at how much rent you can get for the property.
So, when looking for a property and considering how much you need to borrow, it is always worth doing your homework with local rental agencies to find out how much you could get per month beforehand.
Each lender has its own rental calculation to work out how much deposit you need or how much they will lend you, so it is best to speak to a mortgage broker so they can find out which lenders fit your criteria.
Typically, however, buy-to-let lenders will want your rent to cover 125% of your mortgage payments each month. This is known as the 'rental cover'.
Here is an example of a real lender rental calculation to show you how they work this out.
An example of a real buy-to let rental calculation
Let's imagine you are buying a property for £250,000 with a 30% deposit (so £75,000), a typical amount required by a buy-to-let mortgage lender.
This means you need to borrow £175,000. You opt for a deal charging 5.29% interest.
The lender would take this loan amount, multiply by 125% (the rental cover), then multiply this figure by the interest rate and then divide by 12 (months).
The result is the amount of rent your property will have to bring in each month, before the lender will agree to give you a mortgage.
In this case it's £965 a month (£175,000 multiplied by 125%, multiplied by 5.29%, divided by 12).
But what if the property isn't being rented out at the moment? How can you prove it can bring in this much, if you don't own it and so can't rent it out? It's all about what your surveyor says. The lender will expect a surveyor to value the rent on your property at this figure, based on similar buy-to-let properties in your area.
If there is a shortfall in the expected rent, then you will need to put more deposit in to get that deal from that lender. You can work the calculation backwards in this case.
For example, if you know the property will only generate a rental income of £900 per month, you can work out the maximum borrowing. In this case, it would be £163,327 (£900 divided by 125%, divided by 5.29%, multiplied by 12). So to buy the property (which was priced at £250,000), you'll need to increase your deposit from £75,000 to £86,673.
As always, you still have to look at your attitude to risk when it comes to the mortgage itself and whether you want a fixed rate or a tracker deal. Read How to get the best buy-to-let deal for more help on this.
I hope this helps the new budding property investors in you and maybe made it a little bit clearer. You can always drop me an email to tim.wilson@lovemoney.com or speak to our experts on 0800 804 8045 for free advice. Good luck.
Compare buy-to-let mortgages at lovemoney.com