Introduction to the UK Buy to Let market

Currently around 3.4 million (or one in six) households live in the UK private rented sector. (Source: Department of Communities and Local Government). Private renting is growing (up 1.4 million since 2001) - owner-occupation and social housing have been in decline for a decade.

Renting is popular with many sections of the population; students, economic migrants, those who relocate for employment reasons and people who prefer to rent for lifestyle reasons. The view of renting is changing, with the short-term effect of the credit crisis being reinforced by long-term social and economic factors. These include net immigration, growing numbers of single person households, an increase in the average age of first time buyers and people waiting for longer before starting a family. Recent reforms to the social housing sector are also likely to fuel growth in the private rented sector.

The current economic climate, where an increase in tenant demand has not been matched by an increase in supply, has resulted in rent inflation and good yields for landlords, compared to the low returns from deposit accounts and the uncertain performance of the stock market.

The UK population is expected to grow to around 70 million by 2033 but housing supply is not keeping pace. It has been estimated that 290,500 new homes will need to be built each year to satisfy demand (source: National Housing and Planning Advice Unit). Around 100,000 homes were built in England last year (source: Office for National Statistics). Hence the price of property is expected to remain stable or increase over the next decade.

What is a Buy to Let mortgage?

It is a mortgage for investing in residential property with the specific aim of renting it out to tenants – or buying it to let it out.
Specialist buy to let mortgages have been around since 1993. Before then landlords and investors used commercial mortgages to buy property to rent to tenants.
Many buy to let mortgage lenders have quite short term business targets, creating specific funding lines for particular mortgage products. When these lines are used up the product is withdrawn from the market.
Private banks have a slightly different strategy and are willing to create bespoke solutions for the client with the help of an experienced broker such as Private Finance.

What are the lending criteria?

Residential mortgages calculated on the basis of the applicant’s income, buy to let mortgages operate differently.
The mortgage lender applies a rental cover calculation – i.e. the borrower must be able to prove they can receive enough rental income from the tenant to cover the interest on the mortgage.
This cover varies between lenders and is normally between 100% and 130% of the monthly interest payment.
Some lenders prefer landlords with a small portfolio of property and a non-related income stream in addition to income from rent.
The borrower must provide a deposit for the property. Currently buy to let mortgages are available up to 85 per cent loan to value (LTV), meaning the borrower would have to provide a deposit of 15 per cent.

Interest only or repayment terms?

Whether to choose an interest only or repayment (capital and interest) buy to let mortgage depends on the individual's investment strategy.
The repayment option is often suited to investors using property as an alternative pension plan or building a small property portfolio. With monthly capital and interest repayments, the investor can be sure that at the end of the mortgage term the full loan is repaid.
The interest only option is more popular with professional landlords and investors for two main reasons.

Firstly, the investor's aim is usually to continue building a portfolio of property. By choosing this option the investor has the cashflow to keep releasing their capital in order to increase their portfolio. This is usually a long term strategy. At the end of the mortgage term, the property is usually sold to repay the initial advance.
Secondly, there are certain tax advantages as interest due on buy to let mortgages can be off-set against tax. Private Finance can refer you to a qualified accountant for professional advice about the tax incentives available.

Regulation

Buy to let mortgages are not regulated by the FSA (Financial Services Authority) unlike domestic residential mortgages.
Some buy to let mortgages are not available on the high street and can only be accessed via brokers such as Private Finance.

Buy to Let Mortgage Best Buys

To help you find the right buy to let mortgage for you, why not use our Best Buys table to see what rates are available.
Use our Buy to Let Maximum Loan Calculator to see what you might be able to borrow, given the rental income on your buy to let property. This is an approximate guide only.
Make sure you use an independent broker with access to the whole market, including bespoke deals that may be offered only by private banks
Private Finance is well-placed to help you with your next steps so please contact us now