How to: Making your buy to let investment more profitable
Letting agents’ fees can be irksome, sudden repairs inconvenient and void periods stressful. But the biggest cost a landlord faces - one that makes or breaks a buy-to-let investment – is the mortgage. And it’s not something to be forgotten about once the sale is complete and the tenant in place.
“Don’t get comfortable,” says Ed Mead, director at Douglas &Gordon estate agency. “I like to know what I’m doing for five years, but it doesn’t do any harm to check annually. Always use a broker. A broker will know more than you, or the internet, will.”
It is hard for the average investor to keep on top of BTL mortgages, let alone other news in taxation, regulation and the market. That’s the point of The Telegraph’s Property Club. In our weekly articles and fortnightly online newsletter, we provide busy buy-to-let landlords with everything they need to know.
It looks like 2013 will be a busy year for buy-to-let. The average number of properties owned by BTL landlords rose in late 2012 from seven to eight, according to the Association of Residential Lettings Agents (Arla).
New products from existing lenders are becoming ever-more varied and competitive. BM Solutions (owned by Lloyds Banking Group) is to increase its BTL lending from 17 per cent to 21 per cent of its annual lending. Nationwide-owned The Mortgage Works is introducing flat fees rather than percentage-based fees.
Landlords are becoming more savvy about refinancing, too. A survey by brokers Mortgages for Business showed 80 per cent of landlords wanted to remortgage this year, compared with 55 per cent last year.
“Finding a best rate is essential, but this might not be the cheapest; it might just be the one that is right for your investment objectives,” says Kate Faulkner, director of Designs on Property, an independent advice service. “If your aim is for capital growth, get a mortgage that offers a higher loan-to-value so your property covers its costs but won’t necessarily provide much income beyond that. If you want to create income, you need a low mortgage rate to boost your income."
BTL mortgages are traditionally 1-1.5 per cent higher than the average homeowner’s mortgage rate. A good yield in London is likely to be around 5 per cent (and anywhere from 3-10 per cent outside). If you are heavily mortgaged, there is unlikely to be much left each month to provide a significant income, so many investors will be in it purely for the long-term capital gain.
But building societies are proving highly competitive, with lower rates and arrangement fees. “The key is the arrangement fee, which can be as high as 3 per cent - but lenders such as Abbey and Godiva, part of Coventry Building Society, are starting to offer £999,”says Andrew Montlake of brokers Coreco. Skipton’s best BTL rate is a two-year fixed at 3.48 per cent (their lowest owner-occupier’s mortgage is a two-year fixed at 1.99 per cent) with a £995 arrangement fee.
Lenders differ in the number of properties for which they will provide loans. Woolwich, Aldermore and Godiva permit up to 10. Lloyds allows three. If you are looking to remortgage regularly, BTL products without redemption penalties are scarce.
Certain properties may be refused finance - ex-council properties may be frowned upon, as may flats more than five floors up or those above shops.
Investors may also need to provide a 25 per cent deposit to remortgage – hard for anyone who bought at the market’s peak – or they may need to provide a minimum income. It is also usual for mortgage companies to require a rent up to 30 per cent higher than the mortgage cost - so to justify a mortgage of £1,000 a month, most lenders would need to see a monthly rent of £1,300.
Ultimately, your finance must pass the stress test. “If you lost your job, became ill or died, what would happen? Does it all pay for itself?” says Kate Faulkner. “What if rents fell by 5 or 10 per cent? What if property prices fell by the same amount – could you still remortgage? And if the property is empty for months, could you cover the costs of mortgage, service charges and ground rent?”
That’s why getting the right mortgage – and keeping it right – is the most important financial decision you will make.