Over the past few months, there’s been a general easing of the rules which apply to buy-to-let mortgages. Not everyone is completely happy with this and some feel it’s slightly risky for the first-time, inexperienced purchaser. It very much depends whether the rental property has to be strictly self-financing or whether the capital gain side of the deal is the main factor.
In the past it was usual for lenders to ask for a minimum 15% deposit and for income from letting to be 120% of the monthly mortgage payment. Nowadays, there are lenders who are willing to accept a 10% deposit and they are asking for projected income to cover the mortgage repayment.
Lenders offering mortgages on the 100% repayment basis include BM Solutions, Alliance and Leicester, Edeus and Northern Rock.
The 120%, and in some cases 130%, income target left a reasonable margin for times when things were not going so well. Unless a landlord is very lucky with their tenants, there are going to be times when there are gaps between lettings, or unexpected repairs to carry out, not to mention the possibility of falling property prices. In the case of buy-to-let, mortgages are granted on projected income from the property, rather than the buyer’s earnings. For a one-off landlord, venturing into this market for the first time, it’s possible that if they over-stretch their target, they could end up having to finance the project from their own earnings. They should go into this with their eyes open and be fully aware of this possibility.
For those who have been in buy-to-let for some time, things are different. It’s likely that they have built up equity in the property or have other rentals coming in and that these could come “into the pot” in the case of any short-term problems. In addition to this, they’ll have gained some valuable experience in handling their property and some may be in the position to arrange remortgages on existing properties to raise deposits for new ones.
Whilst this second group of investors can handle the generous mortgages, it’s probably as well to advise caution to those just starting out in buy-to-let and for them to consider the advantages of a “safety-net” plan.
With the rising price of property, it may be that a buyer will choose to invest purely in the growth of value in the property and not worry too much whether or not the income totally matches the outgoings. Personal circumstances should be taken into account and it depends on the “back up” available, but if property prices drop, then it may be a matter of riding out the storm and under-funding from the rental income may become a problem in time. Again, that cushion is invaluable.
Lenders are quite happy to fund buy-to-let purchases. The reason for this relaxation in their requirements is that although property prices have risen very nicely in the past few years, rents have not quite kept up. However, the property has obviously proved to be an excellent investment and these investors tend to be reliable. Mortgage arrears are very much less of a problem than with residential mortgages.
With so many lenders offering buy-to-let mortgages, you need to find an on-line broker to do your homework for you. Once you have a clear idea of the type of property you’re interested in and have considered location and likely letting income, they’ll find the ideal mortgage to suit your requirements and limitations. They can search a wide range of companies and come up with the very best deals.
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