3 – FINDING THE RIGHT BUY-TO-LET MORTGAGE

If you are funding the whole purchase of the property yourself then you can skip this chapter as it deals with obtaining further borrowings to finance the property purchase.

A buy-to-let mortgage is a relatively new financial product, emerging onto the market in 1995, which allows anybody to purchase a house or flat with the intention of letting it out. This product allows you to borrow the finance needed to buy the property based on the rental income generated rather than your actual personal income. As long as the rental income is greater than 130 per cent of the interest payment you could purchase the property.

Typically you need 15-25 per cent of the purchase price as a deposit, so for a £40,000 purchase price you would need between £6,000 and £10,000 and the lender would fund the other £30,000 to £34,000. A higher deposit is needed relative to a residential property – typically 0-10 per cent, as the property is not owner-occupied and the lender’s mortgage payment depends on a suitable and reliable tenant being found. Hence this presents a higher risk to the lender. If they ever had to repossess the property they would only need to achieve 85 per cent of the purchase price. This may only be the true market value of the property after it has been tenanted or if there is a property slump at the time of repossession.

WHAT’S BEST FOR YOU?

The most suitable buy-to-let mortgage for you depends on the following factors:

1. Your initial investment
2. The purchase price
3. The type of property
4. Your personal credit history
5. Your attitude to risk
6. The degree of aftercare
7. Duration of borrowing and maximising cashflow

Your initial investment

The initial investment dictates the maximum purchase price. This is best explained in an example:

Investor A has £7,000 to invest. He assumes £1,000 for professional fees and the initial void period leaving a £6,000 deposit. Considering that the maximum loan to value is 85 per cent the greatest purchase price is:

£6,000/0.15 = £40,000

So the maximum he can borrow is £34,000. So the following formula holds:

(Initial investment – professional fees) = maximum purchase price

Deposit required/100

It is crucial to calculate the maximum purchase price so you know what you can afford to buy. There is no point looking at a property that is in excess of this maximum as no lender will lend in excess of 85 per cent LTV. It is also important to ensure your maximum purchase price is in excess of the lenders minimum purchase price – see below.

The purchase price

Almost all lenders have a minimum purchase price. The minimum purchase price starts at £6,500 and rises up to £75,000 for certain lenders. If your purchase price is below their minimum purchase price then the lender will not consider you under any circumstances. So the purchase price can dictate the mortgage you can get.

The type of property

Lenders have certain exclusions based on the type of property it is. The key exclusions are:

1. Studio Flats – These are flats that have one main room that is used as a lounge and bedroom, plus a kitchen and a bathroom. They are excluded, as they can be difficult to sell if there was a property price slump.
2. Ex-Local Authority Houses & Flats – These are properties that were once owned by the local council and subsequently sold on to private people. They are excluded, as they are associated with the lower end of the property market.
3. Flats above commercial properties – These are excluded as the commercial property below could be let out to an Indian or Chinese take-away at some later date. Because of the smell of the food it would lead to a decline in the market value of the property.
4. Flats with more than four storeys – These will be considered as a high-rise block and at the lower end of the property market.
5. Multiple Title properties – These are properties where a freehold exists with a number of long leases and you are trying to buy the freehold. An example of this is a block of flats.
6. Non-standard Construction – If a house is not built with bricks or does not have a pitched tile roof it is deemed non-standard. For example, some houses may be constructed from poured concrete. Despite being perfectly fine houses, lenders may consider these properties inferior to the standard construction properties.

The type of property can dictate the mortgage you can get.

Your personal credit history

What the lender is trying to establish is – are you a good bet? They will need to know that they will get back their money plus interest with the minimum of effort. They will need to establish whether you are creditworthy.

There are two main credit reference agencies that all lenders consult before they make any lending decision, Experian and Equifax. They record a number of details about you based on your current and previous addresses in the last three years, namely:

1. Electoral roll – Details of whether you are on the electoral roll as some lenders require you to be on it before they can lend.
2. County Court Judgments (CCJs) – These arise when a debtor has taken you to court to enforce payment of a debt and the debtor won the case. The court holds this information for six years from the date of the judgment. They also record if you subsequently paid the judgement.
3. Individual Voluntary Arrangements (IVAs) – This is where you have become bankrupt and unable to pay your debts. Once you have been made bankrupt and the debts have been settled then you become a discharged bankrupt. Only once you have been discharged can you have any hope of obtaining credit again. You are automatically discharged after six years.
4. Credit accounts – These are all your loan accounts that have been active in the last six years and whether you have ever defaulted on them. Typical accounts are your mortgage account, credit and store card accounts and personal loans.
5. Repossessions – Details of any house repossessions that have ever occurred.
6. Previous searches – These are previous credit searches by other lenders that you have made a credit application with.
7. Gone Away Information Network (GAIN) – This is where you have moved home and not forwarded on the new address and not satisfied the debt.
8. Credit Industry Fraud Avoidance System (CIFAS) – This is where the lender suspects fraud and just flags it up. You cannot be refused credit based on a suspicion.

Your credit file dictates the mortgage you can get. The key factors are CCJs or defaults. If you have any CCJs or defaults (points 2 & 4 above) you will be restricted to adverse credit lenders who charge higher arrangement fees and interest rates. If you have an IVA, repossession or GAIN on your file it is unlikely you will get a buy-to-let mortgage but you will still probably be able to get a residential mortgage depending on when you had debt problems. It is worth noting that the buy-to-let mortgage market is further developing and a suitable product may come on to the market soon.

There is one key thing you should remember when filling out your form – do not lie! If lenders find out they will demand repayment in full and they could inform the police of fraud – the charge being obtaining finance by deception. The credit reference agencies are becoming more and more sophisticated. They log every bit of information you put on every credit application and if you submit an application that was slightly different from a previous application they will flag it up.

Your attitude to risk

As discussed earlier, your attitude to risk is key to the level of exposure you want to have over events that are out of your control. When it comes to mortgages the only real risk is the interest rate. There are only two categories of type of interest rate – fixed or variable. There are various sub categories of this in the table below:

You have to be careful of the tie-in/lock-in periods that may exist with all these products. These are the minimum periods that you have to remain with the lender without incurring financial penalties if you wish to redeem the loan because you want to sell or remortgage the property.

Some lenders provide all the mortgages above and some lenders only provide some of these mortgages. The type of mortgage you want dictates the lender you have to approach.

The degree of aftercare

Some people require face-to-face contact with their lender. If this is so, then you can really only approach high street banks and building societies. There are many lenders who do not talk to the public and only liaise with your mortgage broker. Personally I don’t mind not having face-to-face contact, as my mortgage broker is quite efficient in handling my queries.

Duration of borrowing and maximising cashflow

The duration of the loan needs to meet your own personal criteria. This depends on your age, personal goals and cashflow. You may wish to own the property outright by a certain age. This means that you require a mortgage that is less than the normal 25-year period or a flexible mortgage where the interest is charged daily and can be settled whenever you want.

You may require an interest only mortgage rather than a repayment mortgage so that your monthly payments are lower. This will maximise your cashflow. Not all lenders provide flexible or interest only mortgages so if this is what you require it will limit your choice.

Typical profile

So after considering the seven factors dictating the type of mortgage you can get, you can build a profile that looks like this:

With this profile you can approach a mortgage broker and he/she will be able to source a lender that meets your profile. I would advise that you make an application with a lender before you find the property so that when you do find a property you can act quickly if need be.

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