Lets compare 85%, 80% and 75% Loan to Value Buy To Let Mortgages.
I’m a professional Mortgage Broker and in many conversations start by the potential customer stating “I want to purchase a buy to let using a mortgage with the least amount of deposit”. If they have done any research beforehand they will know that the figure is 15 per cent.
However, as I’m about to explain this contribution is likely to lead to a disproportionately high interest rate as well as needing an exceptional rental yield to get off the ground. The higher lender set up costs may also erode the deposit saving benefit.
Why is this the case? Well from the Mortgage Lender’s perspective the loan-to-value (LTV) is the main risk barometer. The more you are contributing the greater protection they have so it has a direct bearing on the interest rate. You might think – nothing new here; except the rate, need feeds into the rental coverage required so it becomes an obstacle that only excellent rents can overcome.
So to answer if Low Deposit Buy to Let worth we really need to take a closer look at the numbers.
This is best illustrated with an example.
I have based this on a £300,000 purchase by a higher rate taxpayer, in a personal name rather than under a company, using a 5 year fixed rate, using rental rather than personal income.
Using research from Twenty7Tec 6th February 2020.
Loan to Value / Rate and Rental Comparison
|Loan to Value||Mortgage Amount||Lender||Rate||Main set up costs||Rental needed|
|75%||£225,000||Saffron||3.07% (APRC 5.0%)||£2,559*||£810pcm|
|80%||£240,000||Vida||4.09% (APRC 5.3%)||£3,520*||£1,150pcm|
|85%||£255,000||Kensington||5.29% (APRC 5.2%)||£4,125*||£1,630pcm|
* Total of main
valuation, application and arrangement fees charged by the Mortgage Lender.
Other nominal fees may apply.
** Saffron and Vida apply a rental coverage factor of 140% and Kensington 145%.
As you can see from the table above the rental income has to over double to make the extra £30,000 mortgage. Jumps like this can make the whole idea of borrowing 85% impractical. Also if you choose to pay the setup costs, rather than add them to the mortgage advance where allowed, then really its £250,875 borrowing at 85%. This is also notwithstanding the most important fact the rate has moved up 2.22%, which over the 5 year period equates 11.10% in extra interest rate charges.
Perhaps the start point should be to check Zoopla or Rightmove websites for rental comparisons to the property you have in mind however from my experience most landlords take a reality check and decide to dig that bit deeper to find a greater deposit.