How to pick the mortgage that’s right for YOU

MORTGAGE rates have plunged in recent years — and landlords have been benefiting j ust as ordinary homeowners have. However, the best deals are reserved for those who meet lenders’ specific criteria.

Experts say that knowing which buy-to-let lender to apply to is key to accessing the best rates.

Because getting a buy-to-let loan can be quite complex, almost all applicants use a broker, with only one in ten going direct to a bank or building society.

A broker can search the whole market for the best deal, while banks and building societies will advise you only on their own products. Expect to pay between £400 and £500 for a broker’s advice.

Some of the biggest buy-to-let lenders offer their rates only through brokers. These include The Mortgage Works (part of Nationwide Building Society), BM Solutions (part of Lloyds Banking Group) and Santander.

But a number of lenders, including Barclays, HSBC, Royal Bank of Scotland and Coventry Building Society, offer buy-to-let mortgages through their branches and over the phone.

‘Lenders’ criteria varies hugely, which makes it difficult,’ says Martin Stewart of mortgage broker London Money.

‘Some lend only to those with quite a small number of buy-to-let properties or to those buying “standard” property. They also have different ways of assessing whether you can afford the loan.’

Most lenders will require the rental income of the property you are buying to be 25 pc to 30 pc higher than the monthly mortgage repayment. Some will also ask you to demonstrate a minimum income separate to your rental earnings.

Ying Tan, of Surrey-based mortgage broker The Buy-To-Let Business, says: ‘Of course, everyone wants the best rate, but most people fit only two or three of the lenders’ criteria.’

If you need to buy a property quickly, that can restrict your choice further. The time lenders take to turn around an application to a mortgage offer can vary from two to four weeks.

The bigger your deposit, the cheaper the mortgage rate you will be able to access. Most lenders will ask for a 25 pc deposit as a minimum.

Doug Hall, of Cheshire-based broker 3mc Mortgage Club, says: ‘To access the widest range of deals, you need at least a 30 pc deposit, £25,000 of income separate to rental income and to be buying standard property, such as a one or two-bedroom flat.’

Once you’ve met the criteria, choosing t he r i ght t ype of mortgage will depend on the strategy for your investment.

Are you l ooking for capital growth or regular income? Will your buy-to-let portfolio form part of your pension?

An interest-only mortgage is a popular option for those who want to take income from the property each month. These mortgages allow borrowers to pay just interest during the term, but they must clear the full debt when the mortgage term ends.

‘The main concern for borrowers is ensuring there is enough of a gap between the monthly mortgage payment and the rental income,’ says Stewart.

‘Remember that the mortgage payments will need to be met r egardless of whether t he property has tenants. If you had a void period of a few months, that could put your finances under pressure.’

David Whittaker, of Kent-based broker Mortgages For Business, says repayment mortgages, where the interest and some of the capital is repaid, are more popular with landlords using buy-to-let as part of their pension. ‘If you are investing in buy- to- let as a pension strategy, you will want to own the property at the end of the loan,’ he says.

Another decision is whether to choose a variable or fixed-rate mortgage. Fixed rates guarantee what you will pay each month but tend to be more expensive.

According to Moneyfacts, the average two-year, fixed-rate buy-to-let mortgage is 3.43 pc, down from 3.95 pc a year ago. The average two-year, variable rate is 3.20 pc (3.96 pc a year ago).

‘Many full-time landlords have a mix of fixed and variable rate loans to spread the risk of rates going up,’ says Whittaker.

‘We are recommending a lot of five-year fixes at the moment.’

Product charges can also have a big impact on the amount you will pay over the mortgage term.

Large arrangement fees are common for buy-to-let mortgages, while some lenders calculate t hem as a percentage of the loan.

Charlotte Nelson, of Moneyfacts, says: ‘Investors should try not to be sucked in by the low headline rate and assess the true cost of the mortgage instead.’