According to a recent report from Defacto, a research firm, the number of mortgages on offer to buy to let investors stood at 483 in October 2011, compared with just 237 in 2008. This means that there is now far wider choice, and that should help with getting a better mortgage rate or better terms, such as a higher LTV (loan to value) mortgage.

The report also shows the importance of intermediaries in the market. Some 60% of mortgage deals are now available only through intermediaries at the moment. That compares with 24% two years ago. According to David Black of Defacto:

“The last few years have seen significant growth in the number of buy to let mortgage products on the market. This shows that, although the buy to let sector has contracted in terms of lending levels in recent years, the market is certainly becoming more buoyant with buy to let regarded by many as a potential growth area.

“Our analysis also indicates that intermediaries are becoming ever more important within the specialist buy to let mortgage sector, with the number of brokered products increasing rapidly since 2008. The key challenge for brokers is how to convert these opportunities for the benefit of their business. Essentially, they need to play to their core strength: giving advice – and this is particularly important in the buy to let sector where people are likely to need more guidance when selecting a suitable mortgage.”

There are other signs too that the BTL mortgage market is easing. Barclays has started offering 75% BTL mortgages in recent weeks, up from a previous maximum of 60% loan to value.

Andy Gray, head of mortgages for Barclays, said: “The demand from buy to let investors has picked up in recent months as many people in the UK opt to rent for longer. We’ve also seen increased appetite from investors looking to remortgage. As one of the UK’s largest lenders we recognise the importance of supporting this market further. The five year fixed deal we are offering at 75 per cent LTV is highly competitive and will give investors the stability they need over the longer term.”

It is important to remember that just because there are easier deals out there that allow for higher LTVs, Buy to let investors should still be cautious about taking on too much leverage and debt. The reason that you want a lot of equity in a property is to give you a real buffer against a downturn in property markets. And don’t forget the 3 rules of buy to let investing to be sure you don’t risk everything..

One of the first things that you need to have to get a low mortgage interest rate is a big deposit.

The more money that you can put down, the safer you’ll seem to the bank. The reason for this is that the bank wants to be sure it has a good chance of getting its money back if you ever default. The more you put down, the bigger the bank’s of safety margin. So to get a good rate you really need to think about trying to put down at least 30%, possibly even 40% of the value of the property. Most big mortgage banks reserve their best buy to let mortgages for their best customers and will offer far better rates if you’re able to put down that sort of deposit than if you only have 10% or 20% to put down.
The second factor you want to consider is your own credit history. Your credit score is an important factor in determining interest rate you will pay for your mortgage. Banks will look at it to decide whether you’re a good risk, or a bad risk. If they think you’re a bad risk they may not give you a mortgage at all.
And even if you have only a few black marks against your name on your credit record, the bank may only give you a mortgage at a higher rate. Credit checks are quick and easy (I’ll tell you how to do them cheaply below) so there is no excuse for not doing one.

A fair number of people have got bad credit scores because of a mistake by the rating agency. They may have moved into a property that was inhabited by people with a bad credit score and have had their records tarnished by the previous tenants. Or they may have a family member or spouse or even someone with the same name has not related to them with a bad credit record. It is not uncommon in these circumstances for the credit records to get confused and the innocent get tarred with the brush of those with bad scores. If that is the case you really want to clear that up and get your credit record cleaned before you apply for a mortgage.

It is easy and cheap to do this in Britain.

By law rating agencies have to give you a copy of their records for free although they are allowed to charge a nominal fee for postage. If you write to any of the big credit rating agencies such as Experian or Equifax, they will send you a basic report. This report will allow you to find out whether there are any errors or other issues such as bills that have been repaid but that have still been reported as unpaid. If you discover errors, then you have the right to have these corrected. You can do this by writing back to the credit rating agency with details explaining why you think they’ve made the error, and by law they have to fix it if they are wrong.

You can also get a more advanced online credit report from these companies. Many of them will give you details and instructions on your credit score, and steps that you can take to improve your credit score. The great thing about many of the services is that they are often free for the first month. You can sign up for a month, get the credit report, and then unsubscribe. That should give you a lot of information at no real cost.

This sort of service is also very useful if you have genuine problems on your credit record and want to learn how to correct them. If you genuinely have had problems making payments and have defaulted on credit card bills have been late paying other bills such as utilities, then there is little you can do to immediately improve your credit score. But taking the right steps early can help you improve you credit score more quickly. For instance, your credit score will improve the longer you stay at the same address. And, after a few years bad marks are meant to be expunged from your record. So even if you have a bad credit score, if you start taking action now you can improve it. That becomes your first step to getting the best buy to let rates on your mortgage.

If you click through to the video interview with him, which I highly recommend, he outlines some useful rules for people looking to buy now. Among them are that people should:

1. look at properties generating a yield of about 7%,
2. not go above 65% on loan to value (LTV) to have a margin of safety assuming that interest rates will go up,
3. only look at paying prices that are 30% below their peaks in 2007.

In essensce he argues that you should not expect captial return on any time frame of less than 10 years and should look at the cash a property can generate.  This all seems sensible advice, so perhaps he and I are not as far apart in our views as I might have thought at first.
My advice is to still keep a close eye on the market or take a punt with cheeky offers on especially good prospects. But I won’t be putting money into the market right now. Then again, I haven’t built up a £1 billion buy to let empire, so what do I know.

Your choice of the right buy to let mortgage can make a huge difference to the returns that you hope to make from investing in buy to let property. You should also note that getting a buy to let mortgage has become much more difficult because of the credit crunch. This article will give you some tips to help you get the best buy to let mortgage as well as to manage it.

Before the credit crunch started in 2007, getting a mortgage was usually the last thing on people’s minds. Brokers and banks were tripping over themselves to lend money to residential landlords. Not too many questions were asked about deposits or rental cover or the landlord’s ability to keep servicing the mortgage in the event of the property being vacant for a long time. Instead of demanding the 25% deposits that had been standard for many years, many banks were lending at up to 100% of LTV (loan to value). At that time more than one in ten new mortgages being issued by banks went to buy to let landlords.

Since then banks have completely closed the taps on the best buy to let mortgages. Finding a mortgage has been as tough as finding a beach umbrella in Antarctica. The number of different buy to let mortgage products collapsed by as much as 95%. Even where banks are lending they are being much more picky about which clients they take on and also which properties they are willing to lend against. Buy to let mortgage rates have also shot up a lot. But if you know what you are doing, have the right deposit and property, then you will still be able to get a bank to lend you the money for your property.

Which sort of buy to let mortgage?

First you need to decide what sort of mortgage you want. Traditionally most buy to let property owners have chosen to go for an interest only mortgage. It does what it says on the tin. On this sort of mortgage your monthly payments cover the interest only. The principal amount that you owe doesn’t change at all so even after paying this sort of mortgage for 20 years you will still owe exactly as much as you borrowed. The reason most landlords go for this sort of mortgage is because they can deduct the interest they pay from the rent they receive when filling out a tax return. By not paying off more of the principal, landlords get to minimize the tax they have to pay. But it does leave them reliant on rising property prices to pay of the mortgage.

The second option is a normal mortgage where each month the interest is paid and a small amount of capital also gets paid off. This way at the end of the term of the mortgage (which is usually 20 years but can also be 25 years) the whole amount has been paid off. This is less tax efficient but it is a less risky strategy, especially for a small landlord with only one or two buy to let properties that are intended to finance a retirement. As the mortgage gets reduced the landlord also frees up equity that can be used to finance further property purchases.

The next thing to remember is that the best mortgage for one person will not be the same as the best one for another. Much of which mortgage you choose will depend on your individual circumstances (including whether you are a higher-rate taxpayer) and your tolerance for risk. It also depends on your outlook for the property market. If you think prices will keep rising then it makes sense to minimize income tax and pay off the property through selling it. That way most of your profit will be taxed as a capital gain, which is a lower rate than income tax.

Fixed or variable mortgage?

In the past most landlords simply took out a variable rate mortgage. Depending on where you are in the rate cycle these can be a lot cheaper than fixed rate deals. They are also more flexible should you wish to sell. The disadvantage is that being on a variable rate mortgage will expose you to the risk of rates going up a lot. You may wish to bet that they can go down, but where we stand now with the Bank of England rate at a record low, it is almost impossible to see mortgage rates falling much.

The real risk is that as the economy heats up again that rates may rise. And if inflation picks up they may rise a lot. A fixed rate for 3-5 years is probably more appropriate for beginner buy to let landlords as it allows you a fixed idea of how much you will have to budget to pay each month. Banks may also be more willing to grant one of these as they would see it as less risky.

Given all of the risks you already have to take on such as worrying about property prices, rents and managing your property, eliminating one of the key risks seems a good idea. Be prepared, however, to have to pay a much higher fee for a fixed rate mortgage compared to a variable rate. And be prepared for exit penalties if you pay it off early.

Make yourself eligible for the best deals on landlord mortgages

Since banks pulled back from the buy to let property market after the collapse of Northern Rock, a huge number of potential borrowers have been excluded from the property market. Banks have essentially refused to lend to anyone with anything less than a 25% deposit. They are also being more strict about how much rent a property must generate relative to the mortgage before they will agree to a loan.The interest rates on buy to let mortgages have also shot up in recent years and they are much higher than those for normal residential mortgages.

To be sure to get the best deal with the lowest rate you need to be sure you are attractive to mortgage lenders. These are some of the things they will look for:

1. A big deposit. In many areas and for certain properties banks will demand a deposit of as much as 40%. In some cases they will lend against smaller deposits but they may charge a higher rate. To get the best deal make sure your deposit is comfortably above the minimum. It may even make sense to sell some other investments to raise cash if by adding a few thousand pounds to the deposit you are able to secure a much lower rate

2. Houses or flats in good areas. When banks got badly burned in the crash most of the pain was felt in particular segments of the markets. These were new-build apartments, especially in city centers, where mortgage fraud was rife. Many banks are now simply refusing to lend against off-plan developments and new build without deposits of 40% or more. Banks are also wary of areas where there has been a lot of new building in the past few years and where there is now more capacity than demand. These included areas with traditionally weak property markets that were sold to investors on the idea that they were being regenerated. Avoid these areas unless you are sure you can buy at a very good price.

3. Good rental cover: Banks are keen to see landlords with properties that can get enough rent to cover 125% of the interest payments on the mortgage. That way the landlord has enough to cover rental voids (these are periods when the property stands empty) and pay for essential maintenance. Essentially they want to be sure that you won’t be missing payments so the more you can do to show them that this is unlikely, the better off you will be. Reports from letting agents in the area may help you support your case, but don’t be tempted to fiddle the figures. You will firstly hurt yourself but also set yourself up for a failed application as the banks do their own research too.

Much of the advice that relates to choosing a good property for buy to let will also help you when it comes to borrowing. If you follow the three rules of buy to let investing and get the right property in the right area at the right price is the route to making money from buy to let. And if you can show your bank that you are likely to make money, they will offer you a better deal and you stand a better chance of getting the best buy to let mortgage deal in the market.

In fact internationally worries about inflation have helped push up the price of gold to record highs and have been leading some investors to advise against buying bonds, which fall in value if inflation rises.

Property and inflation

The interesting thing about property investing is that over time it offers some protection against inflation. Normally investors look at commercial property, because there are deep and active markets in which one can buy chunks of big office buildings or shopping centers. Because these have to be renewed or replaced every 20 years or so, their prices must ultimately rise in line with the costs of replacing them, and it is safe to assume that replacement costs also rise over time with inflation.

The same isn’t quite true in the case of residential property. Often in big cities the price of a house will be many times higher than the cost of building it. In London, for instance, the insurance replacement costs of many houses is generally a third or a quarter of the market value. This is because residential house prices also reflect all sorts of factors beyond building costs such as the cost of land, proximity to good schools, whether the neighborhood is a good one, and so on.

Residential house prices

So the question then remains whether buy to let property investments offer any protection against inflation. Over the long run house prices would usually be expected to rise in relation to average wages, which usually rise slightly faster than inflation. In recent years that relationship has broken down and in the run up to the peak of the property market in 2007, house prices accelerated far faster than wages. That the grew so quickly was one of the signs of a bubble becoming overheated.  This means that over the very long run, the prices of real assets such as houses should keep pace with inflation. Over shorter runs, however, property prices can be extremely volatile. Thus over periods of up to 5 years, there is no certainty that prices will rise in line with inflation. If one take the recent drop in prices, house prices in some areas are down by 25%, even though inflation has steadily ticked upward.

The magic power of borrowing

Buy to let property investors do, however, have another trick up their sleeves when it comes to beating inflation. That is that many of them are buying houses using borrowed money. Inflation, simply defined, is the erosion of the buying power of money. If you have borrowed money to invest in a real asset you are letting the bank’s money erode in value while you, in exchange, have a real asset (an investment property) that should retain its value over time.

That idea is supported by figures produced by the Association of Residential Letting Agents  (Alra), a trade body in the UK, that has calculated the impact of inflation on the returns earned by typical buy to let property investors over five years. The following chart shows some of those numbers.

The impact of different rates of property inflation on returns from buy to let property investments. Source: Arla

The blue bars show the projected annual rate of return on an investment in a typical buy to let residential property that is bought for cash. The bar in the middle is based on house price inflation continuing at its average rate. The different graphs to the left or right show the impact of inflation being higher or lower on average over the next five years than it was over the past five.The orange bars show the expected return based on a  geared purchase where the investor puts down 25% of the purchase price and borrows the rest. As you can see the geared return is not only higher but is considerably more sensitive to house price inflation. Lower inflation will cut returns considerably (though in these cases they remain positive) and higher inflation leads to a huge jump in the return that is earned.

What does this mean for buy to let

For buy to let property investors the conclusion would be that when borrowing money from the bank, inflation is actually your friend as it can boost returns considerably. There are however two warnings that should be given. The first is that sharp falls in house prices can really hurt geared investors and put them into negative equity very quickly. They just have a thinner cushion of safety. The other is that when inflation goes up, so does the Bank of England’s rate and so too do mortgage interest rates. Higher mortgage rates can also be a killer if your rental yield is not high enough . If you are expecting a jump in inflation and want to profit from it be sure to fix your mortgage rate.

• rental yield, and
• capital appreciation

Rental yield of buy to let properties

Rental yield is a measure of how much income you expect to make from a rental property. What’s known as the gross rental yield is simply the annual rent divided by the price of the house (and then expressed as a percentage). If for instance you bought a house for 100,000 and expected to receive and monthly rent of 500, you would calculate the gross yield as follows.

1. multiply the monthly rent by 12 to make it annual (500 x 12 = 6,000)
2. divide the result by the price of the house (6,000/100,000 = 0.06)
3. turn it into a percentage by multiplying it by 100 (0.06 x 100 = 6%)

The gross rental yield is a useful starting figure as it allows you to calculate the potential profitability of different buy to let properties. But it is also an unrealistic figure because it does not take your costs into account. A more useful measure is the net rental yield. To get to that you do a similar calculation but you deduct your annual costs such as landlord insurance, management fees, estate agent fees, maintenance and the like from the annual rent before  you divide it by the price of the house.

The beauty of this figure is that it provides a great comparison with other investment options. You can, for instance, compare the expected rental yield of a buy to let property against the earnings yield of shares (equities), the interest rate of a bank account or the yield on investing in bonds. It gives you a clear idea of how much cash you would receive, relative to your investment, if you were to buy a property for cash.

Yet few investors can afford to pay cash and most will need a buy to let mortgage. When assessing a property the more common calculation will therefore be to compare the net rental yield against the cost of servicing your mortgage. This gives an indication as to whether a property can be expected to generative cash or need cash put in every month to help cover the mortgage.

Just remember when doing these calculations to add in a margin of protection. Rents move around less than the prices of properties, but they can still fall quite sharply. Unexpected costs can also arise and your property may be empty from time to time while between tenants or in need of repairs. So always do your calculations conservatively to ensure you are not caught out.

Capital appreciation

This is the money that you will make if the price of your property rises when you own it. Over the years of the property boom capital appreciation provided the bulk of the profits that many property investors made. But many investors have lost everything in recent years by expecting this trend to continue. Many bought properties they couldn’t really afford at rental yields that did not make sense in the hope that they would make their money later by selling at a higher price. If you are making an investment decision that assumes that house prices only ever  rise you are making a big mistake. Your final return will always be a blend of yield and capital appreciation and rental yield, but the first rule of property investing is not to rely only on house prices rising for you to make money.  Instead long term success in buy to let property investing will come from properties that offer an attractive rental yield that allows them to pay for themselves many times over. The gain you make from selling eventually should just be the cherry on the top.