The general sentiment over the past 12-18 months is that UK buy-to-let mortgages are, for the most part, challenging to access, and increasingly expensive. Meeting lenders' criteria – especially around affordability and rent cover ratios – is also more difficult than in the past, which is frustrating for many borrowers. Add in proposed changes to landlord's rights and recent changes surrounding landlord’s tax relief, and it's easy to see why buy-to-let mortgages are so easily pronounced to be 'dead.'
Ultimately, they're often labelled as such because the top-level narrative around rental investments and buy-to-let mortgages focuses on potentially lower returns than in the past and the current challenges of accessing finance. However, this isn't the whole story, and it's certainly not the case for every buy-to-let mortgage holder or potential landlord.
The Current Buy-To-Let Landscape
First things first: buy-to-let mortgage rates are more expensive than just a few years ago and this is undeniable. However, it's not the same as the sector being stagnant, dead or not worth considering for investment opportunities.
Lenders have increased interest rates for buy-to-let mortgages just as they have for residential mortgages. This means landlords may have to make higher monthly payments to their lenders even if rental yields haven't risen in parallel. In some cases, this will have eaten into a landlord’s income to the point that a buy-to-let investment is no longer worthwhile, but this certainly isn’t the case for every landlord – especially at the top of the market.
While much is made of rising interest rates in the press and the impact on landlords, the rate increases were of relatively little surprise to high-value buy-to-let mortgage holders. Interest rates have been at historic lows in recent years, and most landlords in the middle and upper rental market knew this was a relative anomaly. Many buy-to-let landlords saw rate raises as almost inevitable given what goes down must eventually go up – such is the cyclical world of finance and interest rates.
Landlords in the middle market and at the top end of the rental market usually have successful careers with surplus income and/or multiple revenue streams, good savings, capital reserves and asset bases and a solid understanding of the property sector and real estate finance. As such, few rarely 'squeeze' themselves financially when taking out a buy-to-let mortgage and could easily absorb rate increases. In addition to having a good margin between rent and their mortgage, most have additional income they can use to support mortgage payments if their property is vacant for a period or if the rent doesn't cover the mortgage.
At Enness, we've seen that while borrowing capacities are indeed lower than they once were, there are still plenty of opportunities to make good returns in the buy-to-let sector. Accessing competitive finance – albeit at higher rates than in the past – is still very possible. However, getting creative with finding ways to maximise the amount you can borrow while benefitting from the best rates is vital. It is imperative to use a broker who can access the whole market and assess your finances to see what elements you can use to increase the amount you can borrow and give lenders the comfort they need to offer their most competitive rates.
Unlocking The Potential of Buy-to-Let Investments
If you are considering a buy-to-let investment or want to refinance an existing buy-to-let mortgage, how can you maximise what you can borrow and secure the best rate possible?
Surplus Matters: Consider All Your Income Sources
Lenders usually want to see a landlord have a margin of around 150% between what they will receive in rent and the monthly mortgage repayment. With interest rates rising, you may have a shortfall on this amount, but borrowing can still be possible.
Most borrowers considering a buy-to-let mortgage will focus on the rental income the property will generate, and lenders will naturally use rental income as a basis for their affordability and stress testing. However, they can consider your other income if it is presented as part of a buy-to-let mortgage application. It is always worth explaining your other income sources to a broker, even if these are relatively small or totally unrelated to property – they can add up quickly and support the case we make to a lender. We can often use bonus or commission payments, dividends, and net profits from a business to unlock greater borrowing potential for you, and the more clearly you can show that you have a good surplus on the rental cover, the easier it will be to access finance and for us to get you the best rates available.
Consider All Lenders
Non-traditional and boutique lenders tend to have a more flexible and innovative approach to buy-to-let mortgages than high street banks. This means we can often explain your situation and secure financing in cases where it wouldn't be available from a high street lender. As always, this isn't about overstretching yourself or going for a mortgage that isn't affordable; it's about working with lenders that can look more broadly at your financial situation to offer non-standard or bespoke funding packages for a buy-to-let investment. Every loan here will be tailored to your specific circumstances and will likely take your future financial situation and plans for the property into account.
Leverage An Existing Portfolio
If you have an existing portfolio of properties, you can also leverage this to access additional financing. Here, you need to take advice and plan carefully: lenders will want to ensure you aren't overleveraged and that you have (and can maintain) a balanced portfolio that is affordable, even if you have vacant properties for a period of time.
Income from your properties, the amount of debt you have through the portfolio, structuring and any additional, non-rental income you have will all play a part.
While leveraging an existing portfolio to raise finance to purchase more buy-to-let properties is possible, lenders are usually more trepid. They will require more documentation and exceptionally clear, feasible and well-thought-out plans. They will also consider your expertise and experience as a landlord. Therefore, the more factual, clearly set out information you have regarding your portfolio, income, plans and experience, the easier it will be to access finance.
A Bright Future for Buy-to-Let Mortgages ?
While anyone looking to raise finance in the current buy-to-let mortgage market needs to move more carefully in the current interest rate environment, there are still plenty of opportunities to generate good income. While challenges certainly exist, creative thinking when it comes to accessing finance, utilising diverse income streams, and opting for the more flexible approaches of smaller and specialised lenders can help you secure the funding you need to thrive in this sector.
Enness are specialists in broking buy-to-let mortgages for first-time property investors, career landlords, non-UK residents and expats. Get in touch to discuss any questions you have about the current market or get more information on refinancing or taking out a buy-to-let mortgage and how we can help.
The views and opinions expressed in this piece are those of the author and do not constitute advise or a recommendation, nor do they necessarily reflect the official policy or position of Enness. They are also not intended to indicate any market or industry viewpoints, or those of other industry professionals.
This guide is for information and illustrative purposes only and nothing contain within should be construed as advice or a recommendation.
Financing options available to you will depend on your requirements and circumstances at the time. Any changes in your circumstances, any known likely changes, or omissions in the information you provide can affect the suitability of the options available to you. These should be communicated to us as early as possible.
If you are considering securing debts against your main home, such as for debt consolidation purposes, please think carefully about this and consider all other options available to you.
Your home may be repossessed if you do not keep us repayments on your mortgage or other debts secured on it.