Thu 21 Mar 2019 View all news articles
If you're a landlord looking for a buy-to-let mortgage then your current choice of deals is better than it has been in the last 12 years.
New research has found that there are more than 2,000 buy to let mortgage products available on the market, which is great news for investors looking to buy or remortgage a rental property. However, this increased competition has not driven down the cost of borrowing – in fact it's now more expensive than it was last year.
Keep reading to find out more about the great choice of buy-to-let deals now available, and three great tips for choosing the right buy-to-let mortgage.
Choice of buy-to-let deals at highest level since financial crash
Back in 2014, we reported the positive news that the choice of buy-to-let mortgage products had hit a six-year high. Back then, there were 665 buy-to-let products available, a massive 42% more than the previous year when landlords had just 466 deals to choose from.
Fast forward five years and the picture is much more rosy for landlords. New data from financial analysts Moneyfacts has revealed that the number of BTL products currently available is at a post-financial crisis high.
Today, landlords have the choice of 2,162 buy-to-let mortgages, meaning the number of products has not been higher since October 2007, when 3,305 products were available. This means in less than five years, the choice of deals for property investors has more than tripled.
Darren Cook from Moneyfacts says: "It is encouraging that buy-to-let landlords have more mortgage choice than they have had at any time in almost 12 years. Total product numbers have increased by 397 over the past year and by 706 over the past two years to stand at 2,162 products today."
Buy-to-let rates rising despite competition
Strong competition in the residential market over recent months has seen the cost of borrowing fall. However, in the buy-to-let market, rates have actually risen compared to 2018 despite almost 400 new by-to-let mortgage deals being added in the last year.
Moneyfacts research shows that the average two-year fixed buy-to-let mortgage rate has increased by 0.20% to 3.12% since September 2018 while the average five-year fixed rate has increased by 0.15% over the same period.
Darren Cook from Moneyfacts adds: "As there appears to have been no sustained increases in interest SWAP rates since September 2018, a strong argument can be made that the recent increases to buy-to-let mortgages interest rates have been a result of buy-to-let mortgage providers attributing a little more to risk into their product rates due to uncertainty over future economic conditions.
“The disparity in the direction of movement between buy-to-let and residential interest rates may be due to the way these two types of lending are primarily assessed. Buy-to-let mortgage providers generally consider the potential rental income and affordability during assessment, whereas residential mortgage providers typically look back at income earned by the borrower and affordability.”
Despite these rises, the cost of borrowing for landlords has gradually fallen over the last five years. The average cost of a fixed rate buy to let mortgage back in 2014 was 4.17% while the average variable rate was even lower, at 4.03%.
Now, rates average 3.12% for a two-year fixed and 3.61% for a five-year fixed; between 0.5% and around 1% lower than just five years ago.
Three tips on choosing the right buy-to-let mortgage for you
With a choice of over 2,000 deals, how do you find the right buy-to-let mortgage? Here are three factors to take into account.
1. The rental income calculation
When you take a residential mortgage the lender will assess your income and expenditure to determine whether your mortgage is affordable to you.
Buy-to-let mortgages work differently. Instead of basing the lending on affordability, loans are generally assessed on the rental income that the property will generate.
Lenders typically require the rental income to be at least 125% of your monthly mortgage payment (generally on an 'interest only' basis) but the requirement can vary from lender to lender.
If your key objective is to maximise your borrowing, you might have to choose your buy-to-let mortgage based on the lender's rental assessment rather than the interest rate.
Here's an example. If your rent was £750 per month and the interest rate was 2.5%, you could borrow:
£288,000 assuming a rental coverage of 125%
£248,275 assuming a rental coverage of 145%
This shows that even for the same property the difference in loan size could be almost £40,000 based on the lender's rental income criteria.
2. Interest rate
Once you've found a lender who will agree the loan size you need, you'll then have to choose the type of deal you want.
A tracker rate may offer lower initial repayments and you may have the flexibility to repay some or all of the loan without any early repayment charges.
A fixed rate gives you the security of knowing what you will pay for a period of 2, 3, 5 or even 10 years. This can help you budget and you avoid any increases in your repayments if the Base rate were to rise.
However, fixed rates generally come with early repayment charges and so if you sell the property during the fixed-rate period, you could pay thousands of pounds in charges.
Fees for buy-to-let mortgages vary substantially from product to product. Some lenders offer fee-free deals, while others can charge as much as 1.5% or 2% of the loan size (on a £200,000 mortgage this could be £3,000 to £4,000).
As well as a lender fee, you may have valuation and legal fees to pay. And, if you use a mortgage broker, you might also pay a fixed or percentage fee to your broker.
Always take the fee into account when calculating the right deal for you. An independent mortgage broker will be able to compare the overall cost of a buy-to-let mortgage (taking into account both your repayments and any fees) to find the right product for you.
Source: What House?
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