Two similar products – look at the detail.
This is an example of the terms, criteria and costs I would consider for Landlords looking to borrow 80% Loan to Value and minimise the capital required to purchase a property, or maximise the amount of equity that can be released. Below are two very similarly priced products from different lenders and how they could be assessed.
5.79% fixed for 3 years until 31/05/2015 with The Mortgage Works
Arrangement fee 2.5% of the loan amount and can be added over and above the 80% LTV (load to value) required
Early repayment charge of 5% of the outstanding balance until 31/05/2015
Interest rate reverts to 4.99% variable after 31/05/2015
Ability to borrow up to 160.26 times the property’s monthly rental income as assessed by the lender’s valuation survey
Max loan amount £350,000 Min loan amount £25,001 Min property value £50,000
No minimum income criteria and employment status not required.
Must already own and let a Buy to Let property for the last 6 months
Cost over 3 years on a £160,000 interest only advance = £32,487
Cost over 5 years on a £160,000 interest only advance = £48,854
To see how this is calculated click here for previous article “How to choose a Buy to Let mortgage based purely on cost”
Comments: Ability to add arrangement fee to loan amount reduces capital required to purchase the property. This increases the loan amount on which interest is paid hence the higher additional interest cost of £694.80 for the £4000 arrangement fee over 3 years. Current lower reversion rate would reduce long term costs beyond the period of the fixed rate although this could change. No requirement for an applicant to have an income source is a unique selling point for this lender.
5.88% fixed for 3 years with Aldermore
Completion (arrangement) fee 2.5% of the loan amount and will be deducted from the advance
Early repayment charge of 5% year 1, 4% year 2 and 3% year 3
Interest rate reverts to 5.73% variable after 3 years
Ability to borrow up to 163.26 times the property’s monthly rental income as assessed by the lender’s valuation survey
Max Loan amount £400,000 Min loan amount £25,000 Min property value £75,000
No minimum income criteria but applicants must have a verifiable income source
Must already own and let a Buy to Let property
No HMOs, new build flats or ex Local Authority flats
Cost over 3 years on a £160,000 interest only advance = £32,224
Cost over 5 years on a £160,000 interest only advance = £50,560
Comments: The completion fee cannot be added to the loan amount and increases the capital required to purchase the property, but reduces the interest costs compared to adding to the loan by £705.60 over the 3 years. The higher current reversion rate increases long term costs beyond the fixed rate period. The stepped early repayment charge would reduce the cost of redeeming the loan if circumstances changed and forced a sale, or if you wished to remortgage to release equity.
You can see from the two examples above how important it is to take into account an individual Landlord’s personal and financial circumstances both now, across the period of the loan and beyond when comparing Buy to Let products.
Some of the things you need to ask yourself about the next 5 years are:
Am I intending to expand my portfolio and will I require equity for future purchases?
When am I hoping to retire and how will this affect my required return on my investments?
How would an increase in interest rates affect the serviceability of this loan and my wider portfolio?
Will my personal income change, do I have other investments maturing?
Which will be more important; income or capital growth?
What cash contingency will I need in the event of tenancy voids or unforeseen issues?
If you would like to add your own requirements and search for the most popular available Buy to Let products please click here
About Neil Patterson
Neil's career began in banking in 1990. He has also managed a building society branch and worked in business development. He became an Associate Partner of The Money Centre in 2003 and subsequently took on the role of Head of Operations which included training, quality control, project management and compliance. Neil has been a Partner of Property118.com since day one, responsible for operational management which includes, amongst many other things, updating the buy to let mortgage sourcing calculator and quote engine.