In the last few years the UK Buy to Let market has offered landlords the opportunity to enjoy consistently high rental yields, despite a sluggish residential property market. 2014 saw a 7.0% rise in property prices and a surge in demand for rental properties, partly as a result of high levels of foreign investment in the London property market. With an average annual yields of 5.18% in Q4 of 2014 * and an average rate of return of 9.77% over 5 years, the future looks positive for property investment. In addition, investors can benefit from steady capital growth as house prices are projected to average 2% each year in real terms between 2014 and 2025.
First Time Landlords
In the case of Buy to Let mortgages, rental yield (and not property value) is the main source of income. In the present climate, the best chances for a good return lie in long term investments. One way to increase the income you receive from your property is to find the best Buy to Let mortgage deal. It is important to do your research, as first time landlords may not realise that arranging a Buy to Let mortgage is considerably more expensive than a comparable residential mortgage. The interest rates for Buy to Let mortgages are higher than for residential mortgages and there is a minimum deposit of 20% of the property’s value. In keeping with residential mortgages, a deposit of 30-40% will enable borrowers to access the best rates of interest. In addition to this, Buy to Let mortgages have higher arrangement fees, with costs ranging from £1000 to £3500 for a £100,000 mortgage. Bear in mind that mortgages with lower interest rates but high arrangement fees may turn out more expensive in the long run. Buy to Let mortgages are assessed primarily on the rent that you will charge tenants, which is typically 125% of the mortgage repayments. The investor’s personal income, through employment or other benefits, may not be taken into account. For mortgage repayments of £800 per month, the buyer will be expected to charge £1000 in rent to their new tenants. For Buy to Let mortgages, some lenders will assess your ability to pay the mortgage on the higher rate of interest quoted in the mortgage deal, and others have a minimum income requirement, to give the assurance that you could pay the mortgage during untenanted periods or when interest rates rise. It is worth shopping around different providers and getting advice from a specialist Buy to Let mortgage advisor.
Choosing Between Fixed Rate or Tracker Mortgages
There are two main types of mortgages: fixed rate or tracker/ variable rate mortgages. The benefit of choosing a fixed rate mortgage is that your mortgage costs remain the same throughout the mortgage period. This means that your costs and rental yield are more predictable. Fixed rate mortgages are a good idea in a period of financial instability, where interest rates look set to rise.
Currently the best fixed rate Buy to Let mortgage deals include:
|Principality||2.20%||4.6%||Fixed for 2 years||60%||£994|
|Virgin Money||2.34%||4.8%||Fixed for 2 years||60%||£2500|
|Post Office||2.44%||4.7%||Fixed for 2 years||60%||£1190|
|NatWest||2.45%||4.3%||Fixed for 2 years||60%||£1995|
|Skipton BS||2.49%||4.9%||Fixed for 2 years||60%||£1995|
|Platform||2.49%||4.7%||Fixed for 2 years||60%||£2089|
Tracker mortgages (also known as variable rate mortgages) track the Bank of England’s base rate and will only remain the same if the Bank of England rate remains the same. A tracker mortgage can be more unpredictable than a fixed rate mortgage. If interest rates fall, the cost of the mortgage will also fall, but if interest rates rise, the costs of borrowing will increase. Tracker mortgages are advantageous when interest rates remain low for long periods, or when interest rates look set to fall in the near future. In the current financial climate, with record low interest rates of 0.5%, it may seem like a good idea to choose a tracker mortgage. However, before you decide, remember that interest rates will rise eventually.
Currently the best tracker Buy to Let mortgage deals include:
|Virgin Money||1.99%||4.7%||Ends 31/03/17||60%||£2500|
|Nat West||2.05%||4.2%||Ends 31/03/17||60%||£1995|
|Virgin Money||2.09%||4.6%||Ends 01/03/2017||60%||£1094|
First time landlords can benefit from special mortgage deals:
|Nat West||2.55%(Var)||4.5%||Ends 31/03/2017||75%||£1995|
|Virgin Money||2.79% (Var)||2.9%||Fixed Term||65%||£749|
|Post Office||2.89% (Fix)||4.6%||Ends 31/03/2018||60%||£995|
Building a Portfolio
When you are planning to build a property portfolio it is important to consider any restrictions that lenders may place on the number of properties that can be included on one Buy to Let mortgage. This may mean that you cannot apply to a lender within the same parent group once you have reached the upper limit. Currently Halifax Bank will allow a maximum of three properties or up to £2m in investments to be included in the same Buy to Let mortgage. This applies across their parent group, meaning that even if you apply for a mortgage with a different bank, your application will be rejected if the company is part of the Lloyds Banking Group. In addition, investors should be aware that mortgage lenders have a minimum valuation level such as £50,000 and some lenders insist on a minimum property value of £100,000.
Buy to Let lenders may also have restrictions when lending on properties of an unusual construction, such as concrete constructions built for local authorities. Lenders have also been restricting Buy to Let mortgages on some new-build apartments because there is a perception that these are overvalued and they dropped in price during the last property downturn. If you are planning to build a property portfolio you should also remember that some Buy to Let mortgages are likely to be restricted based on the investor’s age during the mortgage period. Most mortgages are available for borrowers aged 18-70; so if you plan to use rental income to supplement your pension, consider the fact that it may be difficult to remortgage once you reach the upper age limit. If you are unsure, consult a Buy to Let Mortgage Broker.
Buy to Let for Freelancers and Contractors
Freelancers and contractors without a fixed income have often found it difficult to access the Buy to Let mortgage market. However, recently the independent mortgage company Kensington has decided to offer a deal to these professionals provided they have been contracted for over 12 months. For experienced landlords, the mortgage will not be subject to an income assessment or be limited to a maximum loan amount. First time landlords can access mortgages for Buy to Let property valued up to £500,000, including for contractors who need to move but cannot sell their current home. The deals will enable borrowing up to 80% LTV, with a £999 completion fee, plus free valuation and legal fees.