Mortgages

Introduction

Most people who are investing tend to go for the maximum mortgage, which is 85%. The mortgage company will send out a valuer to confirm the cost of the property and the rental value (monthly rental income). Each company has its own specific requirements but as a general guide you are looking for the rent to be at least 1.3 times the monthly mortgage interest payment.

Traditionally mortgages have always been offered on the basis of your income. However, with buy to let there is the additional security of the rental income, so often the mortgage company is less concerned about your income and more concerned about the property's rental value. Though generally mortgage companies do like to see some kind of income.

What kind of mortgage?

In most case if you are buying property to let you will be applying for a buy to let mortgage. A normal residential mortgage that you would use to buy your own house that you live in will tend to be a little bit cheaper, but will usually have a clause which prevents you letting. If you are moving and want to let your property, you can often get permission to rent it out by writing to your mortgage company.

The other option is that you might be using a commercial mortgage, perhaps if you have a lot of property or you are buying commercial premises to rent out.

So here we will concentrate on buy to let mortgages.

As with any mortgage there are various options, which mostly relate to the interest rate.

A fixed rate mortgage is just that. The interest rate you pay is fixed for a certain number of years.

A variable rate mortgage has an interest rate that moves up and down in line with the Bank Of England base rate, so if interests rates go up, so will your mortgage payment.

A capped rate means that the rates moves with the base rate, but only up to a set limit, where it stops and can't go any higher.

A discounted rate is where the mortgage is variable but at a lower rate than the mortgage companies standard rate. You might get 2 or 3% lower for a set period of time.

Usually fixed and discounted mortgages will involve some kind of tie in, or redemption penalty, which simply means that you have to stay with that mortgage provider for say 3 years, and if you don't you will be charged a fee. This can be quite high and will either be a set number of months interest, or a set percentage of the loan amount.

Always make sure you understand the implications of this.

Self certified mortgages are generally used by those who are self employed. They allow you to state your income on the application form without having to give documentary evidence to prove it. This is particularly helpful if you have various sources of income, if you have recently become self employed, or if the task of collecting the information together is just too time consuming. You will probably pay a little bit more than if you were employed and could send in payslips, but the rates are still competitive.

A non-status mortgage is fro people who don't have a good enough credit history, and will usually be more expensive and have more onerous conditions attached.

Practicalities

Most mortgage brokers can arrange a mortgage for you for a straightforward buy to let. Where the good ones come into their own is when you start having hiccups or problems. Unfortunately it is likely that you will only find this out through bitter experience.

Which is why it is a good idea to choose a broker who has been recommended to you.

I have used 3 different brokers over the last year. One who charges a notional amount per deal - about £200, one who doesn't charge and one who charges 1%. I am, in principle, against paying for this service, however, I found that the broker I use now, who is the one who charges , has given me by far the best service. Generally speaking we have the surveyor out within a few days and the offer within a week to 10 days (from the start, not from the survey).

Where might you experience problems?

Well often these relate to the valuation, where the surveyor doesn't agree with either your estimate of the property value or your estimate of the rental income. Either way this can reduce the mortgage that you can get on the property.

Back in the days following the previous property crash in the nineties surveyors would almost routinely reduce the value of the property in relation to the asking price. This is really done as a kind of insurance policy to protect themselves from claims against overstating the value. Recently there have been instances of similar behaviour, although it seems to be limited to reducing the price by £1,000, which is almost like they are making a point that they are being careful -, but it doesn't help you!

What can you do?

Well if they reduce the property price, probably not much. Your best option is to go back and renegotiate with the seller to get the price down to what they approved.

If they give a lower rental valuation you can appeal, and if you can show evidence of 3 similar properties at the rental you are looking for, you have a good chance of them re-evaluating it in line with this. This can be time consuming and frustrating, but if it gets you the mortgage you want its probably worth it.

Get to know which surveyors are good and which aren't. Again this will probably only come with experience, but you can also learn by talking to other buyers in your area. There will always be some surveyors who are more conservative than others and so more likely to downgrade your valuations. I know a number of developers who have a blacklist and refuse to deal with certain surveyors who are particularly unhelpful.

A good mortgage broker can help here, because if you find a good one, they will try to get that surveyor to do all your surveys. Basically every mortgage company has a panel of valuers and as long as the one you want is on their panel it doesn't really make a big difference to them who you use.[tip] But you can ask for a specific surveyor, so its worth doing so .

Obviously there is no point being unrealistic in your own estimates or you will never get the mortgage you hope for. If you think a flat will get £450 to £500, then by all means put down £500 , but don't put down £650 or £700 because you wont get it. And quite honestly if there isn't that much difference you shouldn't be buying the property anyway because the numbers wont stack up (unless you are buying it for capital gains only)

Remortgaging

One of the main ways for a buy to let investor to get the money out of their investment property is to re-mortgage it. So when it has gone up in value, they apply for a new, higher mortgage, pay off the old one and pocket the difference. This money can be used as income or used to invest in more property.

Be careful of redemption penalties which could be costly. You may just want to suffer it to get a better deal and release cash, weigh it all up. Don't stop purely for this, look at what you gin overall. The easiest option is to go back to your existing lender for a top up to your existing mortgage, this will cost you less in terms of charges.

Remember when you re-mortgage the mortgage company will reassess the property in terms of meeting its requirements, and your rental must be high enough to cove the new loan amount.