Professional advice essential for ambition to invest in buy-to-let mortgage portfolio
Rates will depend on how much deposit you’re putting down and your credit worthiness
QI’m tentatively thinking of buying a property to let out and, if successful, make further investments. I’ll need to borrow some money, but I have a sizeable deposit. How do buyto-let mortgages work? And can I still borrow if I want to own a number of properties in the future?
AIt is helpful that you have a decent amount of capital to put down, as in order to qualify for a buy-to-let mortgage you'll have a minimum of a 20 to 25 per cent deposit, meaning that you’ll be able to borrow a maximum of 80 per cent of the value of the property you want to buy.
Typically, buy-to-let mortgages are sold on an interest-only basis. This means that you only pay the interest being charged on the loan on a monthly basis, rather than paying down the capital as you would with a residential mortgage. Lenders expect you to have a repayment plan in place to pay off your loan when the term ends in 25 to 30 years. This could be savings or investments or other assets you plan to sell. Capital growth, where you count on the value of your property rising over the term of the mortgage, can be used on buy-to-let interest-only mortgage deals.
In terms of costs, the rates will depend on how much deposit you’re putting down and your credit-worthiness, so not all that dissimilar from residential mortgages. But
affordability checks are quite different for would-be landlords. Upfront fees on buy-tolet mortgages tend to be significantly higher than those on standard residential deals. One thing you will encounter is an ‘interest cover ratio’. This is a calculation used by lenders to work out how much rental income you’ll generate from your property against your monthly
mortgage repayments. They test this using a representative interest rate (around 5.5 per cent) which is typically higher than the one you might be paying, to reflect any potential future increase in costs, and look for your projected rental income to be 125 per cent of your mortgage repayments.don’t expect the checks to become any less stringent if you want to
become a ‘portfolio landlord’, meaning that you own multiple buy-to-let properties.
Back in 2017, the Bank of England tightened the rules, requiring you to provide mortgage details, your business model and cash flow projections for every single property you own in order to get more funds. Some lenders put a limit on the number of properties you can have in
your portfolio, while interest cover ratios may increase and lenders may require the total amount of capital you own in the properties is higher than what you need to get your first buy to let property (say 35 rather than 20 per cent).
Some lenders might consider your personal income as part of its affordability assessment as a portfolio
landlord (known as ‘top slicing’), but it’s relatively rare. I would say that, given your ambitions, professional advice is essential. An independent mortgage broker can scour the market to help you find the right deal and will have access to deals that are only available to intermediaries.