Strategies to grow your property portfolio and get the best buy-to-let mortgage
Buy-to-let mortgage rule changes are the latest in a long line of attacks on property investors. If you didn’t know better, you’d think the authorities didn’t want a private rented sector or anyone to build a property portfolio.
For many property investors in the UK, the last year has taken its toll. It’s harder to maximise rental income profit. You’ve suffered higher stamp duties. Maintenance and repair deductibility has been slashed. Mortgage tax relief is being reduced to 20% for higher rate taxpayers over the next three years. The government, desperate for cash, has gone for the easy option again. It’s like speeding tickets for buy-to-let investors.
Now the Bank of England (BoE) has become involved. New buy-to-let mortgage rules have come into force. The BoE tasked its regulatory arm, the Prudential Regulation Authority (PRA), with helping to stabilise the economy. Its answer was to introduce new affordability checks for buy-to-let investors.
In this property management blog, we’ll discuss what the new buy-to-let mortgage rules mean for investors who want to add to their property portfolio. We’ll also show you how to reduce the impact of the rule changes. It will help you to grow your investment property portfolio and bring your financial goals closer.
The new buy-to-let mortgage rules: a two-pronged attack on property investors
The BoE’s aim is to ensure that the financial system is not put at risk by unaffordable mortgages. It’s a concern that property investors might be over-stretching to build their property portfolio in the current low-interest rate environment. The PRA has established new rules that have two effects on buy-to-let mortgage lenders:
- First, a lender must assess your ability to afford the buy-to-let mortgage. It must base this assessment as if you are paying interest at a minimum of 5.5%, or 2% above your actual interest rate. So, if your mortgage rate is 3%, you’ll be assessed at 5.5%. If your mortgage rate is 4.5%, you’ll be assessed at 6.5%.
- Second, you must show that your rental income will cover your mortgage payments by at least 125%. Most lenders now use an interest rate cover of 140%.
What effect do these new rules have on buy-to-let property investors?
Let’s say you borrow £150,000 to invest in a buy-to-let property valued at £200,000. Let’s say your mortgage rate is 3%. The lender will assess you at 5.5%. It will consider that your mortgage payments on an interest only buy-to-let mortgage are £688 per month.
Now it applies the interest coverage ratio formula. Let’s say its rules state you need the cover of 140%. The minimum rental value of your property will need to be £963 per month. It equates to a rental yield of 6%.
What if you own a property portfolio already?
If you’re a buy-to-let investor who owns more than four properties, there’s another headache on its way. From the end of September 2017, you’ll have to provide income and mortgage details for each, one, each time you apply for a mortgage.
The workload on lenders is going to explode. There is a high possibility that some lenders will stop lending to buy-to-let investors with larger portfolios. If you own ten properties in your buy-to-let portfolio, a lender must gather and assess evidence on all ten properties simply to make a single mortgage advance.
Lenders’ administrative costs are going to rise. They’ll most likely pass these costs on to you. Mortgage costs will increase. Some lenders will probably introduce these new rules before September.
In short, it’s going to be harder to add properties to a property portfolio. If you want to grow your investment property portfolio, you’ll need to develop strategies that help you do so.
Buy-to-let mortgage strategies to help investors build a property portfolio
Now you know the problems the new rules give property investors, what can landlords and you do about them?
My advice is to think like a driver. If you know a speed limit zone is coming up, you slow down, right? And Sat Nav systems now have speed camera positions programmed into them. You’ll get an audible and visual warning that speed cameras are near. Keep your Sat Nav updated, as new speed cameras are added.
So, here’s the thing: you need a Sat Nav for property investors if you are going to grow your property portfolio. You need to know which lender is set up for portfolio property investors. And you need to know which are the best products.
Property portfolio building strategy #1: Use a buy-to-let mortgage broker
A mortgage broker will help you navigate the buy-to-let mortgage market. Not just any old broker, though. Get yourself a buy-to-let mortgage broker. One who has expertise and experience dealing in this specialised market. Reap the benefits of using a buy-to-let mortgage broker.
Okay, so now you’ve got a great buy-to-let mortgage broker. But what other strategies can you use?
If you’re planning a long journey, you’ll prepare for all eventualities. You’ll pack a tool kit, spare bulbs, and a bottle of water. You may fill up the night before, might take some engine oil and washer fluid for your windscreen. There are plenty of things you need to do before investing in property. Not least of these is getting your deposit together.
Property portfolio building strategy #2: Save a bigger deposit
You know that a lender is going to assess the ability of the rental income to cover the mortgage payments. There are things you can do about this. Perhaps the main one is to pay a bigger deposit.
By paying a bigger deposit, you’ll cut the amount of mortgage interest you need to cover with rent. Taking the example above:
Let’s say that instead of a £50,000 deposit you pay a £80,000 deposit. Your notional mortgage interest payments reduce to £550 per month (£120,000 x 5.5%/12). The rental income needed to cover this 140% is £770 – a yield of just 4.62%.
Property portfolio building strategy #3: Use long-term fixed rate mortgages
There are some incredible long-term fixed rate deals on the market for buy-to-let investors. A fixed rate mortgage will help you to budget your finances. If you think interest rates are going to rise, you’ll be protected from higher mortgage payments.
A fixed rate mortgage isn’t for everyone. But fixed rate mortgages of five years and longer allow the mortgage lender to use different buy-to-let mortgage rules. For example, the latest fixed rate buy-to-let mortgage from Barclays lets it use both rental income and personal income as cover for your investment mortgage payments. It means you could borrow more and add higher quality properties to your portfolio.
The downside of fixed-term mortgages is that they can have high product fees and penalties for early repayment. So to make sure it’s the right product for your investment, refer to strategy #1: use a high-quality buy-to-let mortgage broker.
More than just an investment property manager
We manage hundreds of investment property portfolios across the UK. We’re one of the fastest-growing property managers in the country. One of the reasons for this is that we care for our landlord clients as passionately as we care for their all the properties in their portfolio.
We want to help you grow your investment property portfolio. So, we keep abreast of the property market news that affects investment. We build relationships with the professionals that are important to buy-to-let investors. It includes buy-to-let mortgage brokers.
If you want an investment property manager, who go that extra mile, contact one of the Ezytrac team today on+44 1522 503 717. Discover the Ezytrac difference enjoyed by hundreds of landlords up and down the UK.