Best Mortgage Deals
Advice, help, information and guidance on the best mortgage deals available

Buy To Let Mortgages

best mortgage deals by AnnaUntil recently best mortgage deals in the buy to let market were ten a penny. In today’s market buy to let mortgages have been disappearing fast, as property speculators bale out, and lenders take fright, a combination guaranteed to add to falling house prices!!

The buy to let mortgages market is one I know very well, having recently sold a portfolio of properties in the North of England – it seems just in time! The market has been fuelled by hype, cheap mortgages, and a belief that house prices will always rise – many investors are about to find out it isn’t that easy, and the flood of rental properties that will now come onto the market will increase the slump in house prices I am forecasting over the next 2-3 years.

Buy to let mortgages explained

The buy to let mortgage market is very new, with this type of mortgage only appearing in the early 1990’s, following the last major recession in the housing market. As speculators moved into the market, buying property cheaply, they also saw the opportunity to rent their properties, making their profits from the growth in the underlying value of the property, with the rental paying the mortgage. As I explained on the previous page, as the equity increased, the properties were then re-mortgaged and the cycle repeated. Clearly the market needed specialist finance, and hence the buy to let mortgage was born.

Now the only real difference between this type of mortgage and many of the others we have examined, is simply that both the borrower and lender understand that the property will be rented, and that this will be the principle income for payment of the mortgage. Some lenders require proof of additional income to support the rentals should properties be void for any period, some do not and simply consider the rental demand and returns in an area to judge the risks. The best mortgage deals start at 10% loan to value, so you can borrow the remaining 90%, but in the current market these are starting to disappear, with 15% to 20% becoming more the norm.

If you build a portfolio of buy to let properties with a particular mortgage lender then you need to be aware of the lenders overall exposure to any one client. For example a buy to let mortgage lender may only allow a client to borrow £5 million. Whilst £5 million may not be too restrictive, a few lenders set their exposure limit as low as £500,000 (£500,000 may not even allow a landlord to purchase a property in central London!!).

Almost all buy to let mortgages are interest only, since most rents would be insufficient to cover the additional monthly costs of a repayment mortgage, and therefore monthly payments are kept as low as possible. Remember the profit comes from the equity in the house, not from the rentals. Most landlords work on very thin yields of 3% to 4% ( if that ) – yield is simply the rental income divided by the value of the property, so if you buy a flat for £100,000 with an annual rental of £500 per month, the yield is £500 x 12/$100,000 ( assuming there are no voids ) which is 5%. If in addition you have raised a buy to let mortgage at 90% say, or £90,000, then at interest rates of 6%, you are just breaking even on the repayments, but actually making a loss once voids, maintenance and management charges are taken into account. This is why this market is in trouble, since most new landlords have no idea of how the figures work, relying solely on future capital growth for their profits.

Buy to let mortgages and the FSA

All mortgages are regulated by the FSA, except one – you guessed it, buy to let! This often comes as a surprise to property buyers, landlords and tenants. The only exception is where more than 40% of the property is used by the owner or relatives to live. Having said that, there are codes of conduct which advisers and lenders follow. These are rules and general guidelines which have been put in place for the buy to let property market. Even though the buy to let mortgage is not covered in the 1998 mortgage code, these guidelines are still followed by lenders.

Now let’s look at how to find the best deals if you are looking for a commercial mortgage, which is a very different market.

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