How Do I Compare Buy To Let Rates?
Look at our live comparison tables above to find the best deal for you.
When comparing the 2 or more products, it’s important that you look at the whole picture, not just the headline rate. There are a number of other factors that must be considered to ensure that the product selected will be the best for you.
The total cost of borrowing is an important point. Consideration must be made for the fees payable and the rate charged at the end of any introductory period, known as the variable rate.
How Is The Maximum Loan Calculated?
Each lender will have their own methods for calculating the maximum loan. The general method is usually similar, focussing on the expected rental income and your own personal circumstances.
The rent received will usually have to be a minimum of 125% of the monthly mortgage payment, this is known as the income coverage ratio (ICR). Many lenders expect the ICR to be at least 145% – meaning the rent must be at least 145% of the proposed mortgage payment.
How Do I Choose The Right Product For Me?
The right product for you will depend on your own circumstances, what you value most in a product and how you see future changes in the market.
Your own circumstances will dictate your selection, as you will need to meet the criteria of your chosen lender. The key issues that tend to dictate matters here are as follows:
- Minimum age – You must be 25 years old or above with some lenders.
- Minimum income – Some lenders insist that you earn an annual income of £25,000.
- Lenders may have a maximum total borrowing figure (with that lender).
- Credit history – Less than perfect credit history may rule out some lenders.
How Do Different Interest Rate Types Work?
There are a number of different interest types, they work in much the same way as residential mortgages. The main types are:
- Fixed rates – fixed rates usually run for a set time, say 5 years. During the initial 5 year fixed period, the interest rate will not increase or decrease in line with rate changes in the wider market. This gives you certainty of your monthly payments, making it easy to budget, but means that you won’t benefit from rate drops.
- Variable rates – Variable rates come in a few different forms – variable, trackers and discounted rates. These products work in very similar ways, with rates decreasing or increasing as rates change in the market. These products will either change at the discretion of the lender (discount and variable rates), or in line with changes in the Bank of England Base Rate (in the case of trackers).
The Effects Of Adding Fees To The Loan
When taking out a new BTL mortgage, the product selected will often come with an arrangement fee. The lender will usually give you the option of adding this fee to the loan, meaning you don’t have to physically pay out the money upfront.
Although this seems like a logical option, these fees can add up where refinances are taken regularly.
In this case, you will be paying interest on these fees for years to come, which can quickly offset the benefit of securing lower interest rates.
Interest-Only vs Capital Repayment
Unlike with residential mortgages, interest-only buy to let mortgages are commonplace.
Interest-only is a popular option as it keeps the monthly payments down, by allowing the borrower to pay only the interest each month. This means that the loan will not be repaid at the end of the term.
The lender will ask how the loan is to be repaid at the end of the term, with the sale of the property a common choice.
Although it can seem problematic to not repay the loan, it is a popular strategy. This approach allows the investor to rely on the growth of property prices and any difference between the interest and rental income to generate a profit.
When borrowing on capital repayment, your monthly costs will be higher, but the loan will be repaid at the end of the term. This approach still allows you to profit on capital growth but will generally sacrifice the monthly income.
This all turns around when the mortgage is repaid, and your investment will become much more cash flow positive.