When landlords look to acquire a property, it's likely that they'll consider taking out a buy-to-let mortgage to fund the purchase. Over half of landlords currently have some sort of buy-to-let mortgage, according to our annual research study.
And the Council of Mortgage Lenders reports that £900 million of buy-to-let funding was lent in March 2017, as well as a record £4.4 billion in March 2016 - the month before a 3% stamp duty surcharge was introduced.
The buy-to-let lending market is clearly an integral part of the Private Rented Sector and it’s changing all the time. There are now more products than ever. In April, Moneyfacts.co.uk reported that there were 1,047 mortgage products available for first-time landlords. That's up from 956 a year ago and 650 in April 2015.
However, it’s not all been plain sailing as buy-to-let lenders and borrowers have had several obstacles to overcome. Over the next few years, a restriction of buy-to-let mortgage interest tax relief is being phased in andby April 2020, higher tax rate paying landlords will only be able to claim up to the basic rate of income tax, which is currently 20%.
On top of this, since the beginning of 2017, the Bank of England’s Prudential Regulation Authority has imposed stricter lending criteria for banks offering buy-to-let funding. So-called stress tests have been intensified, meaning prospective buy-to-let borrowers now have to prove that they could afford repayments if interest rates increased to 5.5% from a current low of 0.25%.
So, with a plethora of products available and some challenging regulations to consider, how do landlords go about finding the best buy-to-let mortgage for their needs?
What are the benefits of getting the best mortgage rate?
Put very simply, the lower the rate of your mortgage, the less you'll have to pay in interest. Since the financial crisis, the Bank of England's base interest rate has been exceptionally low. Last August, it was cut to a historic low of 0.25% - a move taken by the Government in order to stimulate the economy post-Brexit.
Traditionally, low rates and cuts mean lower monthly mortgage repayments for borrowers on tracker mortgages where the interest rate follows the lead of the Bank of England. Over the last decade or so, however, tracker rates have become less popular as fixed rate mortgage products have taken centre stage.
It's likely that the Bank of England's base rate will rise over the next few years and, as mentioned above, borrowers need to be able to prove they could afford repayments at a rate of 5.5% before being granted funding by lenders.
In order to get the best rate, borrowers need to shop around. There are several price comparison websites which allow landlords to compare and contrast the multitude of available buy-to-let products. Popular choices are Moneyfacts, Money Saving Expert, MoneySuperMarket and Which?.
Speaking to a mortgage adviser or broker can also be beneficial as - alongside expert advice - it's likely they'll be able to offer you some products that only they have access to due to their relationships with lenders.
The different types of buy-to-let mortgages
A significant part of the expansion of the buy-to-let mortgage industry has been the increased number and type of products available to landlords and property investors.
When compared to a traditional owner-occupier mortgage, buy-to-let products have one key difference - lenders take rental income as the borrower's primary income source instead of an annual salary.
Generally, buy-to-let mortgage lenders will require landlords to prove that they can meet at least 125% of the monthly interest payment on the loan before granting finance. Landlords also need to consider the more stringent 'stress tests' detailed above.
Monthly interest payments will either be determined by a fixed or tracker rate or in some cases the lender's standard variable rate.
A high proportion of buy-to-let mortgages are 'interest-only'. This type of loan requires a larger deposit and the landlord's rental income will need to comfortably exceed mortgage repayments.
Interest-only mortgages require the borrower only to pay off the interest accrued on the amount they borrowed each month. This type of mortgage is usually popular with property investors and more professional landlords. This is because an interest-only agreement is good for cash flow - allowing the investor to expand more easily. Properties acquired in this way are most likely sold at the end of the mortgage agreement in order to repay the initial loan.
There’s also of course the option of a traditional repayment mortgage - where the borrower pays back a portion of their loan plus interest on a monthly basis. This agreement seems to suit small-time landlords with one or two properties and those looking to use property investment as an alternative pension fund.
Mortgages rates at an all-time low
Since the financial crisis, mortgage rates in the UK have been exceptionally low and so landlords and investors have been able to source favourable mortgage deals to help fund portfolio expansion.
According to Moneyfacts, buy-to-let mortgage rates were at record lows in April, with some products even coming in at below 2%. It calculated that the average rate for a fixed buy-to-let mortgage in April was 3.34%.
However, as mentioned above, interest rates will rise again and landlords now need to prove that they can afford to pay back a mortgage at a rate of 5.5% before being granted funding by lenders.
In fact, according to Mortgages for Business, the average rates for five-year fixed rate, three-year fixed rate and two-year fixed rate mortgage products all increased between March and April 2017.
That said, now remains as good a time as any to take out a buy-to-let mortgage, with rates low, more products and more lenders available than ever before. Landlords who shop around, work closely with an experienced mortgage adviser and work out which type of mortgage is most suited to their investment are more likely to get the best mortgage deal and reap the benefits of their property investment over the long-term.