New figures have shown that landlords looking for mortgage options have plenty of choice today compared with last year, but the rates on offer are higher than they were - and they continue to climb.
Figures from the independent financial products data provider Moneyfacts show 1,976 buy to let mortgages available in mid-January. This is compared with the 1,455 that were available in May last year. Most buy to let mortgage lenders need a deposit of at least 25% for new property purchases, or 25% equity in the property for remortgages. The figures from Moneyfacts showed an increase in the number of available mortgage deals where only a 20% deposit is needed.
Is this a sign of lender confidence in the buy to let market, despite some being concerned about a property market crash this year? You would have to answer a resounding ‘yes’ to that given the increase in available products, particularly with smaller deposit requirements. This is usually great news for anyone needing a mortgage as more competition drives the best buy to let mortgage rates. Unfortunately, that is not materialising right now.
The average rate for a 2-year fixed rate has increased from 2.89% to 2.92% in space of a few weeks, according to Moneyfacts, a trend which could amount to over a third of one percent if it were to continue. This would mean an increase of nearly £650 per year in mortgage interest for a loan of £180,000.
It’s certainly been a mixed year for landlords, with new opportunities to buy properties with smaller deposits on the one hand, and tighter lending criteria from lenders on the other. The impact of COVID-19 has also meant a record number of tenants have built up rent arrears due to unemployment and furlough. Unemployment is predicted to increase sharply after April this year, which will make matters worse.
Limited company buy to let
Due to these issues, landlords are more conscious than ever of the tax burden they face as a significant outlay. As a result, many are putting their properties into company vehicles to ensure they can offset mortgage interest as a business expense, which cannot be done when properties are held in personal names. In 2020, the second most popular type of new company registration was for property companies, only beaten by online shopping companies.
Although the number of limited company buy to let mortgages is increasing, rates have continued to be slightly higher than the traditional type of buy to let mortgage. However, for most landlords the tax saving by offsetting interest as an expense more than pays for any increases in rates and fees over the longer term.
The factors that determine eligibility for limited company buy to let mortgages is very similar to normal buy to let mortgages, i.e., the rental income that the property generates must fit the lender’s ‘rental stress test’. Factors specific to limited company mortgages are things like personal guarantees being required from the company Directors in the event of a default, and the company being set up with the correct code to ensure it reflects a property management business.
Most buy to let mortgages have an element of complexity, especially in today’s market with lenders being forced to apply strict rental stress tests by the UK regulator. It is therefore important to get the correct advice prior to making an offer no a property, or starting a remortgage. Smartr Finance are experts in investment property financing, and can be contacted here to discuss your requirements.