Over the past 12 months, rising interest rates have caused many landlords significant concern over their next remortgage. With the market settling down, how can you ensure you secure the best mortgage deal for your needs? Jeni Browne, Director at Mortgages for Business
With interest rates stabilising at a new normal, property investors will be looking to secure the best deal they can for their next remortgage. However, many of you will find that tighter stress testing from lenders may make your application process more difficult. It’s important to understand why this has changed and what you can look out for when choosing your buy to let mortgage product to secure the best deal.
How Buy to Let Mortgage Affordability Works
With buy to let mortgages, lenders assess whether the property is self-financing. Ideally, the rental income is enough to cover the mortgage repayments even if mortgage interest rates rise, plus additional costs such as tax and property maintenance. This assessment is often known as stress-testing or Rent to Interest (RTI) calculations.
Prior to last year’s mini-budget, which saw mortgage rates rocket, lenders typically stress-tested rent at 145% coverage against an assumed interest rate of 4% – 5.5% for applicants applying in their own name, and 125% at 4% – 5.5% for limited companies.
However, following Kwasi Kwarteng’s announcement, this all changed. With many buy to let rates at around 6%+, stress testing has become much more onerous meaning that landlords can borrow less per £ of rental income. Currently, the rental calculation is now 125/145% coverage assuming an interest rate of 6.5%.
Because lenders are still wary of any further market activity that could drive rates up again and impact their borrowers, they are continuing to conduct vigilant affordability tests. With the cost-of-living crisis still impacting many, most lenders have also increased their Rent to Interest (RTI) calculations to 145% for individuals and 130% for limited companies.
With affordability and RTI tests much tighter than what many investors are used to, how can landlords secure a good deal? There are some things that property investors can look out for to help them through their application process.
What you can look out for
Some products will have special features that may bring down the cost of the rate, or make it a better deal for you overall. For example, some products offer cashback, free valuations, and/or legal fees. These features may help you to save money over the course of the mortgage, or help you to secure your product in the short term.
Legal Fees and Lender Arrangement Fees
Something to look out for when choosing your mortgage product is any legal fees and lender arrangement fees. Legal fees (if not free) will be an added cost to your mortgage application process that you must bear in mind. Similarly, lender arrangement fees can be quite expensive. Some lenders charge a set amount upon completion while some add a percentage of your loan to your mortgage, which can be around 3%. But watch out; some lenders are balance lower mortgage interest rates with higher arrangement fees – sometimes 7%! – which actually end up being more expensive overall than products with higher headline rates.
Cheapest Doesn’t Mean Best
The right mortgage for you isn’t necessarily going to be the one with the cheapest rate. You may find that a mid-range mortgage product from the right lender suits you best, so it’s best to bear this in mind when looking for your next deal. You might be able to borrow more with a lender charging a higher interest rate, or get more flexibility around overpayments and early repayment charges (ERCs).
Using a Whole-of-Market Mortgage Broker
Following on from the last point, to make sure you find the right deal, using a whole-of-market mortgage broker, like Mortgages for Business, who can access products from all lenders is vital. Our brokers can access lenders who don’t deal directly with applicants, and these specialist lenders may be suitable for your application. Understanding your circumstances means we can approach the right lenders for your long-term investment plans. Furthermore, your broker will be able to highlight any other fees or benefits that come with your rate, and calculate costs over the whole mortgage term, giving you confidence in your application.
If you would like to speak to one of Mortgages for Business’ expert brokers about your next mortgage, submit an enquiry here.
Mortgages for Business will be attending the Property Investor Show 2023 on 21/22 April at London ExCel – www.propertyinvestorshow.co.uk
Mortgages for Business Limited is authorised and regulated by the Financial Conduct Authority (313537) to transact regulated mortgages. The FCA does not regulate some investment mortgage contracts.