As a buy-to-let landlord, the most important criteria for your mortgage lending is to find the most cost-effective solution to avoid your interest costs eating into your rental property profits.
Revolution Brokers are a BTL specialist broker, and here we will look at how interest-only buy to let mortgages work, and what to look out for in your mortgage offers!
For personal support and advice about securing the most cost-effective financing for your investment business, give us a call on 0330 304 3040.
How Interest-Only BTL Mortgages Work
Buy-to-let mortgages are a type of mortgage that finances the purchase of an investment property, with monthly interest payable against the loan.
The advantage for a landlord is that the monthly payment consists only of the interest charge, so the regular payments are lower. At the end of the loan term, you will need to decide how to pay back the full value of the original borrowing - usually either by remortgaging or by selling the property.
Why Landlords Choose Interest-Only Mortgages
Interest-only mortgages carry lower monthly repayments, and so are a cheap way of borrowing. Every month the payment is solely the interest charge, although this does mean that the capital balance remains the same throughout the mortgage term.
Pros of Buy-to-Let Interest-Only Mortgages:
- Cheaper monthly repayments
- Easier to cover repayments when the property is vacant
Cons of Interest-Only for BTL:
- The capital borrowed is not repaid
- The repayment through selling the property is dependent on the future property market
- Interest cost is overall more expensive than a repayment mortgage
Eligibility Criteria for BTL Interest-Only Mortgages
This form of lender is higher risk than a repayment mortgage or a residential mortgage, and therefore most lenders have a fairly strict list of eligibility requirements.
These vary between lenders, but most commonly include:
- Minimum experience requirement - specialist lenders will lend to first-time investors though
- Limits on the number of BTL mortgages held by each investor
- The age limit of at least 21 - although some lenders will consider applicants aged 18 and above
- More significant deposit requirements, usually from 25% and above
How Your Personal Income Impacts BTL Mortgage Affordability
Many lenders will consider your personal income as part of the assessment process. This is to help them understand whether you will be able to keep up with the repayments, as well as what sort of rent you can expect to achieve.
The typical standard is to offer lending capped at a multiple of your annual income - often around 4-4.5 times - although some lenders are more flexible.
Having secure full-time employment is seen as a positive since you can demonstrate a stable and regular income to reduce the risk to the lender. Some lenders are also familiar with self-employed applicants and staggered income bases, and so can offer to lend based on a different calculation.
Credit Rating Assessments
Your credit score is always considered when applying for lending, and most mainstream BTL lenders will not consider making a mortgage offer if you have a bad credit score.
However, this depends on how long ago your financial difficulties were and all the other factors involved in considering your mortgage application, so it is still possible to secure lending.
If you find yourself in this position, give us a call on 0330 304 3040, and we will help identify the right lenders who will be happy to extend you an offer.
BTL Mortgages and Types of Property
It is far easier to secure interest-only lending against a property if it is a standard brick and mortar residential premise.
This all depends on how easy the property is likely to be to rent out, and so non-standard buildings are usually best mortgaged through a specialist lender.
Borrowing Limits on Buy-to-let Interest-Only Mortgages
The amount you can borrow depends on:
- Your income
- The anticipated rental income
- How much deposit you have available
- The type of property
- Your credit rating
Each BTL application will be considered on its own merits, for the lender to decide whether the investment is viable, and how comfortably you can make the interest payments.
Usually, the rental yield required for a property investment to be considered viable is around 125% of the mortgage payments.
For example, if you are investing in a property costing £100,000 at an interest rate of 5%, your monthly payment will be £417. To achieve the right level of affordability, the property will need to generate at least £521 in rent each month.
Lenders will look to assess the anticipated rental income to verify any estimates you have provided them with. As rental values can change over time, some lenders also look at income coverage ratios (ICRs) to calculate the amount of risk involved.
ICRs work n the same way - by calculating how easily the income generated from rent will cover the interest costs.
To find the right lender for you, and to work through the affordability criteria with confidence, give Revolution Brokers a call, and we can help with these calculations to ensure you apply to the right BTL lenders!
Personal Income and BTL Borrowing
Lenders primarily consider the projected rental income to decide whether to extend an offer. Some lenders will also consider your own income, mainly if the investment looks viable, but there is a shortfall between the anticipated rental cover, and what you need to borrow.
We work with specialist lenders who use a more tailored system to calculate the amount of lending they can offer, and the affordability of that lender, based on each applicant.
Deposit Requirements for BTL Mortgages
Buy-to-let mortgages usually require a higher deposit than you would expect to need for a residential mortgage. This is because the lending is higher risk, and so the maximum loan to value ratio (LTV) available is lower.
Most BTL mortgage lenders look for a deposit of around 25%, with an LTV ratio of 75%.
Revolution Brokers work with lenders who can offer a more generous LTV ratio of up to 80% depending on your experience as a landlord, so if you'd like to buy a new investment property but don't have a 25% deposit available, give us a call!
Choosing Between Repayment or Interest-Only BTL Mortgages
There are advantages and disadvantages to both types of mortgage, so what works best for you will depend on your budget and circumstances.
With a repayment mortgage, your loan will have been repaid in full when the loan terms ends, whereas, with an interest-only mortgage, the total balance will remain outstanding.
However, the monthly costs of a repayment mortgage are always higher than for interest only.
As a comparison for a property costing £160k and charged at 4% interest:
|
|
Total Mortgage Cost
|
Total Interest Paid
|
Monthly Repayment
|
|
Repayment
|
£252,316
|
£92,316
|
£841.05
|
|
Interest-Only
|
£326,175
|
£166,175
|
£553.92
|
Interest-Only Mortgage Exit Strategies
If you decide to use an interest-only mortgage to purchase an investment property, you will need to know how you are going to pay back the original loan value. This is often necessary before a lender can extend a lending offer to you.
Common ways to repay the capital balance on an interest-only mortgage include:
- Selling the property at the end of the mortgage term
- Repaying the balance with investments such as stocks or shared
- Remortgaging
- Using ISA savings
Should you be considering an interest-only mortgage and need help with your exit strategy, get in touch today, and we will work through the options with you.
Interest Rates on BTL Mortgages
Rates between lenders vary wildly and depend on multiple factors. As a whole of market broker, Revolution Finance works with a vast network of established UK lenders to compare and contrast the most attractive deals on the market to match with your financing needs.
Many of the mainstream high street banks offer interest-only mortgages and work with BTL landlords. However, it is crucial to compare the rates of interest and terms on offer to ensure you are getting the best value.
LTV ratios are also an important consideration and are crucial if you have a limited budget to pay a deposit from.
It is common for an interest-only lender to offer a fixed interest rated for around five years - but again, this depends on the circumstances and what sort of lending is best suited to your property portfolio.
Taxation and BTL Mortgages
From 2020, there are changes to be aware of when it comes to taxation for landlords. As of July 2020, the Stamp Duty threshold has risen to £500,000 - although landlords and investors purchasing a second property are still liable to pay the additional duty for a second home.
For more information about Stamp Duty for BTL landlords, take a look at our guidance page explaining the rates and thresholds in more detail.
There are also changes in the tax relief available for landlords. In the past, the interest costs associated with a BTL mortgage could be dedicated from declared rental income, thus reducing the tax liability. Now, this is deductible as an expense, which means that investors with more significant properties or levels of income may fall into a higher tax bracket.
For expert support and guidance with every aspect of securing a competitive buy-to-let mortgage and negotiating the most tax-efficient business structures, give Revolution Finance Brokers a call on 0330 304 3040 or drop us a message at info@revolutionbrokers.co.uk.
