The mortgage loan industry is extremely competitive with loans now dependent upon affordability calculations. While this has had an impact on the buy to let market, even though rental income is still very strong, there are still many mortgage companies offering attractive loan to value ratios.
What is a buy to let mortgage?
A buy to let mortgage is a mortgage loan taken out by a landlord to acquire a property which is available to rent in the private sector. The loan to value ratio of buy to let mortgages tends to be no more than 70% unless using private banks and niche mortgage lenders. The interest rate on a buy to let mortgage loan will depend upon the income available, size of the loan and value of the property. While the expected rental income from a private landlord property does not count towards the mortgage loan affordability calculation, it does help to strengthen cash flow.
Buy to let mortgage affordability
Even though a private landlord will likely have significant rental income to put towards a buy to let mortgage, this income is not generally included in the mortgage affordability calculation. Traditional mortgage lenders will require a minimum of £25,000 income per annum before offering a buy to let mortgage. The affordability calculation will also take into account other mortgages, outgoings and assets which can be used as collateral against a mortgage loan.
Equity release to buy new property
When looking at a buy to let investment the rental income should cover all of the mortgage payments. As a consequence, the element of equity in the property will increase and offers private landlords the ability to remortgage and expand their property portfolios in the future. When looking at equity release to buy new property, landlords will need to maintain a degree of “headroom” when considering their financial liabilities, property value and rental income. If a landlord was unable to cover mortgage payments in the future then the mortgage company could potentially call in the debt and sell the property.
Rental income
As we touched on above, rental income should cover the majority if not all of buy to let mortgage payments. Private landlords should also ensure that rents rise in line with inflation which helps to maintain a comfort zone between assets and liabilities. Rental yields will vary in different parts of the country and for different types of residential accommodation. It is essential private landlords ensure their property rental rates are competitive and maximised to assist with cash flow. If one property was to be repossessed, there could be a knock-on effect to other buy to let rental homes in a portfolio.
Buy to let mortgage interest rates
Buy to let mortgage interest rates have crept higher over the last few months but mortgage providers are still in a competitive environment. Due to historically low UK base rates it is possible to lock in buy to let interest rates at around 2% fixed for between two and five years. This gives a degree of certainty with regards to mortgage payments and allows private landlords to plan ahead with cash flow, investment and the balance between assets and liabilities.
Summary
Even though the UK buy to let property market has lost some of its shine of late, it is still an important part of the UK property market. A lack of social housing has led to many people looking towards private landlords placing upward pressure on rents and rental yields. Property investors will need to research their future targets, negotiate the best mortgage rates and keep a close eye on cash flow.