Recent months have seen renewed belief in the rental market as landlords are now able to take advantage of more buy to let mortgage options since the beginning of the COVID virus outbreak. Consumer advice group “Which?” have reported that in June of 2021 demand for rental properties across the UK soured, with property investors seeing hundreds of new rental opportunities being snapped up off the market.
Buy to let mortgage brokers seem confident in the security of the market, with a survey from Paragon showing over half of UK mortgage Brokers expect market activity to surge in the next twelve months. With rent prices continuing to reach record highs, it can be seen why this could be a lucrative time for new landlords to start their journey, or for seasoned veterans of the letting industry to expand their rental empire.
Further data gathered by Moneyfacts has stated that the number of buy to let mortgage deals currently available to landlords is around 2,700, an undeniable increase of over 1000 new products in just the last twelve months showing just how much these lenders need to reignite the rental market across the UK.
In keeping with a market trend that has emerged in the years preceding the pandemic, as the rental industry moves towards a more progressive and energy conscious position an increasing number of mortgage providers are offering lucrative deals to rental property owners that have “green” properties.
In most cases these mortgage providers will offer landlords a heavily reduced interest repayment, alongside a dramatic fall in the amount they are expected to pay towards the deposit for he buy to let mortgage. However, these incentives are exclusively available to landlord’s who wish to take out this form of mortgage on a property with a high energy efficiency rating. As it stands most qualifying properties are required to have an energy efficiency rating of a C or above, with some being placed even higher. With this being said, many landlords have condemned these requirements as simply unobtainable, with the amount of rental properties currently achieving the highest grades in energy efficiency, an A or B grade, sitting at a dismal 2%.
When comparing this lowly figure to the overwhelming 85% of rental properties within the UK that are achieving a C or a D rating and it’s not hard to see why landlords feel these offers from mortgage providers are nothing more than a hollow gesture, prompting some to leave the rental industry for good after months of hardship, regulation changes and heavy restrictions on what would have been deemed regular conduct prior to the COVID outbreak.
However, with the UK government trying to edge the entire rental sector towards increased accountability regarding its carbon footprint, some are hailing this as a wise move that forces new properties that enter the rental space to already be far closer to achieving future thresholds for the Minimum energy Efficiency Standards. Currently landlords are prevented from advertising their rental opportunity to aspiring renters if the rental property has failed to achieve an energy efficiency rating of at least an E rating, something that is set to periodically increase over the coming years, forcing rental property owners to make their accommodation more environmentally friendly.
Principal Broker at Hamilton Fraser Total Landlord Mortgages, Daniel Lee is certain that these new forms of buy to let mortgages are here to stay, despite some appearing to be fleeting after being introduced during lockdown only to be later withdrawn from the market, saying “This is clearly a condition which will become more prevalent, particularly if in the future mortgage lenders are required to track and annually disclose the average EPC rating of the properties they lend against.
“Landlords should take note of this and be looking at ways to make energy efficient improvements to their rental properties, not least so they can achieve the best mortgages rates, but also to protect the saleability and value of their investment.”
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A buy to let mortgage is a specific kind of mortgage that is exclusively available to those that intend to use the property as an investment to generate an income as oppose to using it as their main residence. It is commonly asked if aspiring landlords are able to forge their own path into the rental industry with their existing residential mortgage, however this is strongly discouraged as in the overwhelming majority of cases this will be a breach of the mortgage’s terms.
When seeking to take out a buy to let mortgage for a rental property, unlike a residential property that will more commonly demand a far lower deposit amount from the investor, a buy to let mortgage will require the aspiring owner to produce around a quarter of the property’s value. However, with this being said it is not uncommon for some landlords to have been required to pay at least 35% of the property’s value for the deposit on their buy to let mortgage.
When taking out a buy to let mortgage, the landlord will also need to account for the maximum loan to value. This essentially determines that amount of the rental properties value the landlord is able to borrow through he buy to let mortgage, with those that are able to pay a higher amount through the deposit being able to enjoy the benefit of a lower loan to value. Put simply, the more a landlord is able to offer their buy to let mortgage provider upfront, and therefore reduce the risk the mortgage lender incurs in extending the landlord this credit, the cheaper the buy to let mortgage will be in the long run. However, as can be expected this is simply not viable for all rental property owners and those looking to expand their rental portfolio, with the more appealing loan to value rates demanding as much as half of the property’s value be paid upfront.
This is not to be confused with the repayments akin to those seen in residential mortgages, as they will typically involve a repayment scheme to be established, but with rentals this is not the case. When taking out a buy to let mortgage landlord can expect to exclusive pay off the interest on the loan, with none of the initial borrowed capital being repaid. Although this naturally means that a landlord is able to concern themselves with occupying the rental and generating an income faster and arguably with increased efficiency, it does not mean that the owner of the rental is absolved of their duty as once the term of the mortgage comes to a close they will still be required to repay any borrowed amounts in full. With this in mind this is why many rental property investors and landlords seek out high returns when selling their property in order to cover the initial capital provided by the buy to let mortgage.
Although it is certainly not unheard of for a buy to let mortgage being obtained by those that are taking their first steps onto the property ladder, in most cases, buy to let mortgage lenders will only offer such schemes to those that have already held a residential mortgage.
As can be expected mortgage providers are typically more hesitant to offer buy to let mortgages to applicants due to the inherent risk that is undertaken when letting out a property. This is because there are a number of factors that could generate the landlord’s ability to generate a consistent income and therefore meet their obligation to make the regular payments to the provider towards the interest on their loan. If the rental property is abandoned, in need of significant maintenance work and repairs, the residents fail to pay their rent on time, or if the rental opportunity is left unoccupied for an extended period of time then the landlord will be left without any rental income to pay off the interest on their buy to let mortgage.
Thanks to the lack of control a rental property owner can have over these influences on their income mortgage lenders will naturally assess the financial suitability of each applicant to ensure that they are able to meet the financial obligations that come with a buy to let mortgage. Similarly to the tenant referencing process this evaluation will involve the scrutiny of the applicant’s credit score, to ensure that they have not accumulated any historical debts that they are unable to clear or have any county court judgements against their name.
Whilst this financial evaluation is certainly not unique to the buy to let mortgage, in stark contrast to the residential mortgage the applicants current earing are not taken into consideration, with the potential for the property to generate a decent rental income being the barometer for if the mortgage should be issued against the property. With this in mind the providers will often calculate the interest to cover ratio; a stress test against how much rental income the property is expected to generate against the landlord’s mortgage repayments, with additional consideration being made for the current interest rate. The majority of buy to let mortgage providers will demand a minimum interest to cover ratio of 125%, although it is not unheard of for some providers to require a higher 145%.
Further to this buy to let mortgage providers typically will account for the age of the applicant alongside a comprehensive review of their finances. In most cases the mortgage provider will have a maximum age by which an applicant is able to successfully take out a buy to let mortgage. Whilst this is not the case with all mortgage providers, the reasoning for having such measures in place is largely due to the length of buy to let mortgage terms, typically running for around 25 years.
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