Finding Buy-to-Let Mortgages

	Name	Score	Visit	Disclaimer
	Unbiased	8.4	Visitunbiased.co.uk

Unbiased offers a wide variety of expert financial advice covering insurance, financial, mortgage, and accounting. Its model is to connect customers to one amongst its network of over 27,000 professionals. All experts listed with them are regulated by the relevant industry bodies and work independently of product providers.

Not only is the service offered free of cost, but they also donate 30p to Samaritans each time a customer enquiry is matched successfully to a professional.

Though professionals are listed free of charge on their website, they can also pay for more visibility – which means that a higher rank doesn’t always transltate to better service.

	Name	Score	Visit	Disclaimer
	Habito	7.0	Visithabito.com

Habito offers online advice that is fast and completely free, scanning through over 90 lenders. Additionally, customers get to interact with humans over chat, whenever they want.

There’s assistance for a wide range of buy-to-let transactions, including portfolio, limited companies (SPVs), individual, HMOs, holiday lets and remortgaging. The free mortgage advice and application service specifically includes recommendations from Habito experts and tracks the application till a logical closure, which is normally the mortgage offer from a lender.

They also offer Habito Plus, a service that comes for a fee but covers every aspect of buying a property where they hold your hand the entire way, from finding the property to finding a lender and then navigating it through the process, including legal requirements.

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	John Charcol	7.5	Visitcharcol.co.uk

John Charcol is a recognized, full-service independent mortgage broker. Their product range covers all types of loans and customer requirements, whether it is your first home, or property as an investment.

They are a whole-of-market broker with access to over 120 mortgage lenders. Their scale gives them access to special rates for their customers and exclusive offers from time to time that are not available to other customers.

Charcol can support you in navigating the set of steps from conceptualisation through to the eventual ownership and receipt of rentals. They also offer complementary products often needed by customers such as insurance, conveyancing, legal advice, and even setting up utilities and council tax. Their professional partners also include a concierge service that helps customers prepare the property for tenants.

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	Better.co.uk	8.5	Visitbetter.co.uk

Better.co.uk’s online platform rifles through 12,000 mortgage deals offered by over a hundred lenders in order to surface the most suitable options. The online engine is backed up by a team of dedicated mortgage professionals. Each customer gets a dedicated mortgage adviser and a case manager, alongside a 24/7 online support helpdesk.

Their service is free for most customers, except for those with an adverse credit history. Product owners, like lenders or insurers, pay for the advisors employed. They are not paid incentives to recommend specific lenders, and their commission doesn’t depend on the size of the loan.

The effort is to adhere to the established process and find the customer the most suitable deal.

A measure of their sensitivity to customers is their deployment of ‘soft’ credit checks for an initial assessment so that it doesn’t leave a footprint on your credit report.

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	Mojo Mortgages	6.8	Visitmojomortgages.com

Mojo’s service is underpinned by their award-winning Mortgage Matcher platform that creates better matches by taking into account variables such as disposable income, credit information, and mortgage preferences. The platform also presents easily comparable information.

Based on specified inputs, the Mojo engine rifles through the 90+ lenders and their buy-to-let offerings to select the closest matches.

Mojo experts are available to customers for consultation during their journey, starting from the search for the property and a suitable lender, right through to the fine-tuning, paperwork, legal documents, application filling, and disbursal.

Mojo is covered by the Financial Services Compensation Scheme (FSCS) and clients are eligible for compensation in case of failure to meet commitments.

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	Tembo	6.9	Visittembomoney.com

Self-branded as a family-friendly mortgage broker, the startup is backed by the likes of Aviva, Guardian, and easyJet.

They have made an effort to carve out a niche for themselves in the underserved lower-income segment, which is the first to bear the brunt of stricter criteria for lending and has to pay the so-called ‘poverty premium.’

Their products have helped many who would otherwise not have been able to afford a mortgage and build up home equity.

Many of their users have relied upon their family Boost mortgage, through which family members can pool resources to pay lower interest rates. According to its own estimations, Tembo has increased buyer budgets by £82,000.

A buy-to-let mortgage, like any other loan, depends on the lender’s evaluation of the risk present in the transaction and how much they can earn from it. Since buy-to-lets are considered to be riskier propositions than residential mortgages, most lenders will agree to a loan that is a lower percentage of the property value than they would permit for a residential one.

Why is this the case?

A personal dwelling is a necessity that people are expected to care for even in the most demanding circumstances. A buy-to-let, on the other hand, is a source of additional income. It is great to have while the going is good, but could be neglected by the owner in times of stress. Borrowers with two mortgages have been known to prioritise the ordinary mortgage payment over the buy-to-let when financially stressed.

A buy-to-let often has a tenant over whom the lender has no control. Regular monthly repayments of the mortgage is dependent upon the rentals being serviced on time by the tenant. If the tenant defaults, the owner could face difficulty in servicing the debt.

The expected rental income is another variable which can affect the value of the loan. The rental yield, in most cases, is the primary source of revenue from which the loan repayment will be made.

A higher rental value will enable a higher loan, with a higher repayment, to be afforded. Periods when there is no tenant, and therefore no rental income, need to be factored in. While there is no mandatory limit, the rental yield is expected to be at least 125% of the value of the instalments to be paid and could go up to 150%.

The borrower’s income will also be taken into account by the lender to cater to situations when the property is untenanted for an extended period.

Though future rentals cannot be guaranteed, borrowers can obtain an estimate through discussions with estate agents and brokers while reviewing properties. Estimates can also be obtained from Zoopla, Rightmove, and other websites that list rental properties, The lender is also likely to conduct similar checks to determine future rentals.

Since buy-to-lets are considered to be riskier than ordinary residential mortgages, a minimum deposit of 25% of the value of the property is the norm which can be lowered in exceptional cases. At times, it can go up to 40%.

For ordinary mortgages, on the other hand, most lenders are satisfied with a deposit value of 10% of the value.

The balance, then, becomes the loan amount. The loan amount measured as a percentage of the property value is referred to as the LTV (loan to value) ratio. The higher the LTV, the greater the risk carried by the lender.

Case study: expected LTV ratio for buy-to-let vs residential mortgage

There are no defined parameters for the rates applicable to buy-to-let mortgages – lenders are free to determine the rate. However, more often than not, they tend to be higher than an ordinary mortgages.

Interest rates reflect the amount of risk a lender takes, therefore the higher the risk present, the higher the rate.

Improving your credit score is a time-honoured method of getting a better rate. Here are some simple steps that could help you improve it:

• Ensure data with credit agencies is correct – you don’t want to be marked down because the data was incorrect.

• Ensure your financial liabilities are discharged in time and fully; pay more than the minimum requirement.

• Keep credit utilisation low; in a sort of perverse logic, lenders are more comfortable lending to people who use a lesser amount of available credit.

• Get regular payments such as rentals added to your credit report.

• Identify a suitable lender and then apply; indiscriminate applications will leave footprints on your credit record and are not generally favoured by lenders.

• Avoid bankruptcy and enter an individual voluntary agreement (IVA).

These points are applicable to the improvement of credit scores in general and are not specific to a buy-to-let situation. There is no easy or quick way to improve your credit score – your creditworthiness is a result of your history. It cannot be undone or changed overnight.

Any person fit to borrow is eligible for a buy-to-let mortgage. Though this places the minimum eligible age as 18, many lenders prefer to consider applicants over 21.

However, the decision to lend rests with the lending institution. Though norms vary from one to the other, the following are the basic criteria almost all lenders consider when deciding on a buy-to-let mortgage, rates, and LTV ratio:

✔️ The borrower is creditworthy, and in a position to repay the loan;

✔️ The rental income will cover the repayment requirements, by a factor of at least 1.25;

✔️ The borrower has a primary source of income other than rental from this property;

✔️ Property type and location;

✔️ Some lenders may also require that you own a property before they accept a buy-to-let mortgage application from you.

There are three types of tax obligations that buy-to-let mortgage holders should be aware of:

Income tax

The rental income property owners generate becomes additional income and is liable for income tax at applicable rates. It could also push you into a higher tax bracket than what you would otherwise be in.

Prior to April 2020, you could have set off your mortgage-related expenses against the income to reduce your tax bill. Under the mortgage interest relief at source (MIRAS) scheme, tax relief could be obtained on interest for mortgages up to £30,000, which went up to £60,000 for unmarried couples with joint mortgages. However, with effect from April 2020, this is no longer permitted.

Instead, tax relief can be claimed on 20% of the mortgage interest paid.

Capital Gains Tax (CGT)

This becomes applicable when you sell the property, in the likely event that the selling price is greater than the price at which you purchased the property. The difference is your capital gain and subject to capital gains tax.

If a property purchased for £500,000 is sold for £600,000, the difference of £100,000 is your capital gain and taxable.

Stamp Duty Land Tax (Stamp Duty)

A buy-to-let property or a second property usually attracts higher stamp duty rates than the first residential property. Also, stamp duty rates are based on slabs. The higher the property value, the greater the rate at which stamp duty is charged.

Buy-to-let mortgages are primarily interest-only loans where the interest on the borrowed amount keeps getting serviced by the borrower.

A repayment mortgage is also an option. The buy-to-let investors service the interest as well as the principal through regular monthly payments throughout the mortgage term. This is akin to the ordinary mortgage.

The primary benefit of an interest-only mortgage over a repayment mortgage is that it is easier to service as a lower amount needs to be paid off. On the flip side, it does not result in building up equity and often the property needs to be sold to pay off the borrowed amount.

A fixed rate is a pre-determined rate agreed upon between the two parties. It is generally issued as an introductory offer for a defined number of years and gives way to the lender’s standard variable interest (SVR) rate after the period is over.

Variable interest rate, or standard variable interest rate (SVR), is linked to the Base Rate of the Bank of England (BoE), but determined by each lender independently.

A tracker rate is a type of variable rate that is directly linked to the Base Rate of the BOE, and defined as a fixed percentage above it. If the BoE Base Rate is 4%, and the tracker rate agreed is 2% over it, the applicable rate will be 6%.

A fixed-rate mortgage provides predictability as the interest payment remains constant. A variable rate, on the other hand, can be beneficial when market rates are low but more expensive when rates rise. In general, most lenders offer greater flexibility in mortgage repayments with variable rates, such as excess payment during financially comfortable periods.