An essential guide to buy-to-let finance

The UK buy-to-let market has grown substantially over the last 20 years or so with investors looking for long-term rental income streams. A shortage of rental properties right across the country has seen consistent demand for buy-to-let mortgages. There are a number of factors to take into consideration when looking at the buy-to-let mortgage market which we will cover below.

What is buy-to-let finance?

In it’s most simple form, buy-to-let finance is a mortgage arrangement tailored to a property which will be rented out to tenants. There are obviously a variety of different buy-to-let mortgages available today but in effect you buy a property, rent it out to tenants and the income is used to cover mortgage payments. The main goals for buy-to-let investors is finding a property which can create a rental income stream that more than covers the cost of finance – leaving an additional income stream for the future and creating capital growth opportunities.

Many people have gone on to create large buy-to-let property portfolios, with multiple rental income streams and growing equity as purchase finance is paid down.

What type of projects can you use this finance on?

As you might expect with a growing and popular area of the property market, buy-to-let mortgages are now available for many different types of project. Houses in multiple occupation, flat conversions, flats above commercial premises and newbuilds are just some of the types of property which can be financed with buy-to-let mortgages. Some specialist property finance companies such as Vantage Private Finance also offer buy-to-let portfolio finance which involves a taking security over property portfolio assets keeping all of your finance in once place.

What are the benefits of B2L finance?

If a buy-to-let investment is structured correctly then the rental income will more than cover finance costs and any additional expenditure on the property. In effect buy-to-let finance allows investors to build a long-term rental income stream with the added possibility of capital appreciation in the future. Some things to be aware of are the recent tax changes in the buy-to-let market which mean a Stamp Duty Land Tax levy of 3% is applied to all buy-to-let property purchases. There has also been a change to the way buy to let income is taxed through the phased removal of mortgage interest tax relief, so now is more important than ever to take advice on the best way to structure a new portfolio or even how to consider restructuring your existing portfolio. We have seen an increase of Limited Company applications to help mitigate these effects but it’s not always the right decision for everyone hence the importance of seeking proper tax advice.

At this moment in time demand for private rental properties in the UK (and indeed local authority rental properties) is extremely strong therefore there is the significant possibility of increasing rental charges in the medium to long term. Any increase in rental income can allow investors to re-invest profits into their buy-to-let mortgage to bring down their mortgage balance and increase their equity within each buy-to-let property.

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First and second charge mortgages

When acquiring a buy-to-let property investment the buy-to-let finance arrangement is often referred to as the “first charge” mortgage. This effectively means that the amount of finance provided by the buy-to-let mortgage provider is secured on the value of the property by way of a first charge. Obviously as the outstanding mortgage payment reduces with regular monthly payments the value of the charge reduces and the “equity” the investor has within a property will increase.

A “second charge” mortgage revolves around the ability to take out further finance, which could be used to fund additional buy-to-let property investments, using equity in a property as security without affecting the first charge mortgage. Many people are confused as to why an investor would not simply re-mortgage the whole property and repay the original mortgage. There are occasions where it may be beneficial to retain the initial mortgage because of favourable terms or a favourable interest rate which could not be replicated. Taking out a second charge mortgage allows the owner to raise further capital which can be used elsewhere.

What factors might affect your eligibility to apply?

The buy-to-let market is very different to traditional mortgages because from day one there is the opportunity to find a tenant and receive regular rental payments. In effect the tenants are repaying the finance used to acquire the property and in the long term hopefully increasing the equity of the investor. While no investment market is risk-free the buy-to-let market is often considered to offer more security than most by investors.

Many of the specialised buy-to-let mortgage companies today can consider lending to clients with some adverse credit, ex-pats, foreign nationals, limited company applications and even situations where there is no credit score available. A number of companies will lend to applicants over 70 years of age.

The PRA recently imposed a new set of standards for Banks offering buy-to-let mortgages which impacts the amount that can be borrowed against each property in many cases, especially lower yielding properties. This is due to the stressed interest rate which must be applied along with the amount of headroom which is expected over and above the payment using the stressed interest rate. This is not as extreme for Limited Company applications and the rules have to be adopted by lenders authorised by the PRA by January 2017.

Finding the best buy-to-let mortgages

Such has been the growing interest in buy-to-let property investments that the Internet is awash with comparison websites together with banks and specialist agents also advertising their buy-to-let mortgage services. Buy-to-let specialists such as Vantage Private Finance are able to scour the market for the best deals available and have genuine expertise in this market. It is worth noting that aside from the headline rate you also need to take into account the specific details of each buy-to-let finance arrangement as there may be additional charges. In an ever more complicated world of buy-to-let mortgages it is really important that you seek advice from a specialist.

Whatever your specific financial situation there will likely be a buy-to-let finance specialist on hand to give you advice, assistance and find the right package for you. You can ask questions directly to our resident experts in our specialist Finance Forum here.

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