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Residential Landlord Finance

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advice for all buy to let
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Buy to let finance for Residential Landlords

Most landlords rely on mortgage finance to make their property purchases. However, consumer mortgages are generally not suitable – it will be a breach of the conditions of the mortgage to let the property without the prior approval of the mortgage lender.

If you are borrowing to buying property to rent, you will be required take out a ‘buy to let’ mortgage.

These tend to have longer repayment periods than commercial mortgages and are for larger percentages of the purchase price (higher ‘Loan to Value’, or ‘LTV’), but are more expensive that consumer mortgages.

Typically buy to let mortgages are limited to 75 per cent or 85 per cent of LTV. Higher figures have been achieved in the past. Lenders take into account expected rental income and will expect this to exceed repayments, typically by 25 per cent or even 50 per cent.

Lenders may restrict the amount they will lend per property – although this might be as high as £1m – or per portfolio.

Landlords who have borrowed heavily against their properties – negotiating high LTVs, or becoming ‘highly geared’ in financial parlance – have done well (at least on paper) while property prices have been moving upwards. This is because they may have paid for only, say, 25 per cent of the property, they benefit from 100 per cent of any rise in value.

The downside with this strategy is that they remain committed to high regular payments whether or not their properties have tenants. And if things go wrong, say because the property cannot be let, or tenants abscond, it can take some time to sell the property to raise cash – even in a rising market. So the higher the gearing, the higher will be the potential risk.

Buy to let mortgages come in a number of different forms: fixed rate mortgages, variable rate mortgages, capped, low start, interest only or interest plus capital repayment.

The terms over which fixed or other rates apply can vary from as little as one year to the whole term of the mortgage. There may well be penalties for early redemption by repayment or re-mortgaging.

Which mortgage will be the most suitable will depend on many factors including availability, the landlord’s assessment of the way interest rates are likely to move or whether he or she prefers to take interest rates movements out of the equation to some extent by opting for a fixed rate that will not change for a specified period no matter how Bank of England or inter bank lending rates change.

Landlords who expect interest rates to go up and who like to know that their outgoings are fixed are more likely to choose fixed rate products. Those who judge that interest rates are moving down are more likely to favour variable rate or tracker products. 

Landlords in search of buy to let mortgage finance will naturally want the best deals available. What those might be will depend upon their own circumstances, their business credentials as landlords, the amount they wish to borrow, over what period, and the LTV this represents. The best deals, of course, will go to those landlords who lenders perceive to be less of a risk – experienced landlords with established property portfolios, whose borrowing represents relatively low LTV with good rental cover. 

Landlords can approach lenders directly or use one of the specialist buy to let mortgage brokers. Either way it is likely an arrangement fee, probably between 1 per cent and 3 per cent, will be charged (usually this is added to the loan).

As a starting point for finding suitable buy to let mortgages the website Residential Landlord maintains a list of current mortgage offers.





The Landlord's Handbook has everything you need to know about being a landlord – go to www.harriman-house.com/thelandlordshandbook to purchase your copy.




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