Make the most of the buy-to-let loan war

18 April 2015, The Times

The cost of deals is falling but lenders are the most generous to new landlords with substantial deposits, says Melanie Wright

Falling buy-to-let mortgage rates combined with higher rents mean that if you’re considering becoming a landlord, now could be the time to act.

According to the latest HomeLet Rental Index, released last week, rents rose in 11 out of 12 regions across the UK in the first three months of the year. The average monthly rent in the UK is now £902, or £270 if you exclude the Greater London area, and last month the estate agent Barnard Marcus reported that the average rent in the capital was £1507. While this may be bad news for tenants, it means landlords are benefitting from higher returns.

Martin Totty, chief executive at Barbon  Insurance Group, parent company of HomeLet says: “With average rents for new tenancies across the UK now more than 10 per cent higher than a year ago, what we are seeing is a market that is experiencing sustained demand from increasing numbers of people requiring privately rented properly.”

Research for The Times Money by Moneyfacts.co.uk reveals that the average buy-to-let two year fixed rate is currently 3.36 per cent, compared with 3.94 per cent a year ago. The average buy-to-let five-year fixed rate is 4.26 per cent, down from 4.66 per cent a year ago. Several lenders have reduced their buy-to-let mortgage rates in recent weeks. Natwest for example, has cut some rates by up to 0.55 per cent. It is now offering a two-year fixed deal at 2.25 per cent, although there is a hefty £1,995 arrangement fee. This mortgage is available to first time buyers, second time buyers and those mortgaging with a 40 per cent deposit.

Although low buy-to-let rates might be tempting, the best deals are reserved for those with substantial deposits. For example, Santander offers a two-year fixed buy-to-let rate at 2.35 per cent with a £1,995 fee if you have a 40 per cent deposit, but its two-year rate if you have only a 25 per cent deposit is 2.79 per cent, again with a £1.995 fee.

Simon Tyler, of Tyler Mortgage Management, says: “Lenders can be very fussy about by-to-lets and probably the biggest differentiating factor is the size of deposit you have to put down.”

“If you only have a 20 per cent deposit, hardly anybody will want to lend and the deals that are available are relatively expensive with big fees. For example Aldermore Bank offers an 80 per cent buy-to-let deal with a variable rate of 4.48 per cent and a fee of 3 per cent of the loan amount. So if you are borrowing £20,000, that’s a £6,000 fee.

“Some people may think these sorts of fees are worth paying in order to get on the property ladder but the fact is that it is very difficult to meet other criteria, such as receiving enough rent to cover the mortgage interest by a sufficient margin to qualify, let alone make a profit.”

Another potential pitfall is void periods. While landlords must be prepared for times when their rental property is empty, what kills an investment is lengthy void periods, warns Camilla Dell, managing partner of Black Brick, a property buying agency. “Generally speaking, flats are a better investment because the void periods tend to be smaller. Even if you’ve got a lot of money to invest it’s better to spread it out over lots of units than buy one large one.”

Yields are likely to be greater too. “A really good one or two bed-flat should be getting a yield of at least 3 to 3.5 per cent. With a much larger home that could drop to 2 per cent or under.”

Age matters

Your age is determining whether your application for a buy-to-let mortgage will be accepted. Many lenders impose a maximum age cap of 70 or 75 at the end of the mortgage term although others are less strict.

David Hollingworth of London and Country mortgage brokers, says “For example, Kent Reliance can lend to a maximum age of 85, and lenders such as National Counties Building Society will assess on a case by case basis rather than impose a strict cap.

“The Mortgage Works has changed its approach to a maximum age of 70 at application and a borrower could take out a 35- year mortgage term. This recognises that some investors will be considering buy-to-let as part of their strategy to generate income in retirement, especially given the introduction of more flexible pension rules.”

If you’re a younger borrower, lenders will generally want you to be at least 21 years old and an existing property owner.

Mr Tyler say as: “Lenders are very wary of first-time buyers applying for buy-to-let loans because they are available on an interest-only basis with far fewer affordability checks, but then living in them themselves.”

The rent on the property you plan to buy must cover 125 per cent of the mortgage payment, and many lenders require that you have a minimum annual income. For example, Coventry BS, Santander and Accord require all buy-to-let borrowers have a minimum annual income of £25,000. Mr Hollingworth says “The minimum income requirement can be different depending on whether you’re applying on your own or with someone else. For example, Coventry wants at least £30,000 for joint applicants, although some lenders don’t distinguish between single and joint.”

Location, location, location

Buy-to-let lenders won’t be keen to end on all types of property and in all areas, even if the sums stack up. Mark Harris, the chief executive of SPF Private Clients, a mortgage broker, says “Lenders have restrictions on property types and locations. For example they might only want limited exposure to properties above nightclubs, as smell and noise issues cause concern.”

Mr Tyler says: “It’s all about resaleablity . Sometimes they [lenders] don’t like the centres of provincial towns because they had their fingers burned when the market crashed during the credit crunch. For example, Leicester and Nottingham were particularly hard hit. Many don’t like former local authority properties and won’t lend on flats above the fifth floor of tower blocks.”

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