Buy to let mortgages are a very major part of our business these days and we have a substantial number of clients in this field - some with just one investment property, others with large portfolios.

The buy to let market has been particularly affected by the recent turbulent economic times, and whilst some of our clients have taken the opportunity to substantially increase their portfolios because of the glut of cheap property that has come onto the market, others have been badly 'hit' by dropping property values and difficulties with accessing further funds to refurbish existing properties or purchase new ones.

There have been two major problems which existing buy to let property owners have had to contend with, and for many these problems are continuing.

1.  During the latest 'boom period' which ended in the beginning of 2008, funds for investment property purchase were freely available - too freely as the wonderful gift of hindsight will tell us - and it was possible to borrow up to 90% of the property value, and provided the interest payment was covered by the rent received, that was fine.  However, along came the 'credit squeeze'  and suddenly not only did property values start falling dramatically, but mortgage funds for investors became very difficult to obtain.

The result of this was that many landlords found their properties virtually in negative equity overnight and further borrowing on properties which had recently been mortgaged  up to 90% of their value became impossible.  Of course, landlords who were either very sensible or extremely fortunate and did not have high equity mortgages have not been so affected by these problems

2. Many of the established specialist mortgage lenders in the investment field either stopped lending or ceased trading.  Well known lenders such as Mortgage Express, Capital Home Loans, Paragon, Bristol & West and many others are no more as far as current lending opportunities are concerned. 

All of this has combined to make the buy to let market very difficult, especially for established landlords who perhaps became too confident that property values would continue to rise substantially year on year and funds not only for improving existing properties but  also to buy new ones would continue to be freely available.  Alas we have all had a salutory lesson!

 So the present position?.

 1. Existing property owners owning properties with little or no equity are 'stuck' as far as using their properties for borrowing purposes is concerned.  Of course this does not really matter if the properties are producing a satisfactory rental income and there is no need or desire to sell.

Such property owners have little option other than to sit tight and wait for values to start increasing again, or dispose of their properties at a loss if they have to sell.

2. Every cloud has a silver lining, however, and many investment mortgages have reverted to the lender's standard variable rate following a tie in period, which has often resulted in a substantially reduced mortgage outgoing.  Often landlords have found that their mortgage payment is now covered several times over by the rental received.  Those landlords who are wise have taken advantage of the reduced mortgage payment and paid over and above their required mortgage payment to reduce their capital balance - others have used their surplus funds to  help purchase further properties at bargain prices in a falling value market. We have a substantial number of clients who have been on tracker mortgages for some time and have seen their mortgage rates and consequently mortgage payments fall dramatically in recent months.  Very often, paricularly with HMO properties such landlords are finding that their very much reduced mortgage payment is  most welcome! 

3. If you have cash or can raise funds by using equity in other properties that is great, but if you are  currently looking for a mortgage to either buy or remortgage an investment property, please note:

The maximum mortgage in any situation is now 75% of the lower of purchase price or valuation. - and some lenders will not advance more than 70%.  If you are buying, therefore, you need a deposit of 25 - 30% of the purchase price.  You will need a similar margin if you are thinking of remortgaging. 

Mortgages for properties requiring an HMO licence(student type properties) are particularly difficult at the moment, but we do have facilities for placing these mortgages in many cases. The maximum borrowing on an HMO type property is usually 70%  of the purchase price or valuation 

The amount you can borrow, therefore, is limited by the 75% (or 70%) rule (above) and in addition the  mortgage outgoing, calculated on an interest only basis, must be exceeded by 25%.

For example - if the  interest on the mortgage worked out at £500 a month, the rent received (and it is not a figure that can be plucked out of the air but would have to be confirmed as reasonable by the lender's surveyor) would have to be approximately £625 a month.

Please note -  if you  are repaying on a capital and interest basis, it is  only the interest portion which is taken into account in the calculations.

And as for current products and rates? 

Although the position is improving, there are currently only a handful of lenders operating in the buy to let market.  This means that there is a distinct lack of competition, and this in turn means that currently products and rates are not particularly inspiring.  In addition to the above equity and rental income requirements, a further potential problem to many is the fee added on by the lender (we charge no fees ourselves as you will be aware).  Although this fee can be added to the amount borrowed and paid with the mortgage, such fee can be anything up to 3% of the mortgage amount.

Despite this, many such products are being taken up.  The attitude of many landlords in a buyer's market is to set off any fee added to the mortgage against the saving which has been accomplished by obtaining a property at a good price, and consider the fee a price worth paying!

Here are a few observations which may be helpful - they are based on enquiries and discussions we deal with daily from existing or aspiring lndlords

1. Yes - if the circumstances are right, now is a good time to buy investment property!  Without doubt there are some tremendous bargains about at the moment. We are very much in a buyer's market, and the concessions on stamp duty are making propostions much more affordable. Experienced landlords are buying at auctions in increasing numbers, although having cash available for such purposes which is really essential, can be a problem. There is no doubt, however, that there is a large demand for rented accommodation, particularly as young people are still finding the mortgage market very difficult and often have no alternative other than to rent. 

2. Many landlords are bemoaning the fact  - and are often very concerned - that their properties have fallen in value.  Indeed some are even in a negative equity situation.

To such I normally ask 2 questions! 1) Are you thinking of selling? and 2) Is the property fully let?  If the answer to question 1) is 'no' and to question 2) 'yes' I try to assure such landlords.  If the property is fully and consistently let, and you have no intention of selling, it doesn't really matter if the property has temporarily fallen in value.  Despite all the gloom and doom merchants, the property market will recover - it may take longer than normal, but it WILL recover. Remember what you have always been told about the buy to let market - it  is a long term project!

3. Landlords whose mortgages are with Mortgage Express have become very excited recently because that lender has been offering to waive redemption penalties for those landlords who wish to repay their mortgage or transfer it to another lender.  This, I fear, is  very much a ploy to rake in cash to the lender as they are very anxious to reduce their mortgage book. In the first place, unless you have substantial equity in your property you couldn't transfer the mortgage to another lender anyway.  This is because most Mortgage Express mortgages were taken out on the basis of 85% of the then value of the property.  With the drop in property values and the limit on mortgages now at 75% maximum, it is impossible to transfer to another lender in the majority of cases.  Furthermore if you were in a position to transfer to another lender, there is no point, because the fees which the few lenders currently in the buy to let market are charging would probably outweigh the benefit of the waiver of interest penalty by Mortgage Express!  The only landlords who will benefit by this 'offer' are those who have the cash available to redeem their mortgage.

Finally  on this subject, it should be noted that Mortgage Express are obviously aware that most of their borrowers currently with a product which carries an interest penalty for early redemption will  automatically transfer to their standard variable rate or a rate geared to base rate when their existing product ends.  The tracker  rate(with base rate below 1%) is currently well below 3% - little wonder that the lender wants borrowers to redeem as such a rate is hardly an economical one for them.  So Mortgage Express borrowers (and those with most other lenders)- if you haven't got cash to redeem, and are still on a fixed rate, with little equity in the property, the advice is to 'hang on in there' as your interest rate is likely to fall dramatically when your current product ends.

4. A note to landlords who specialise in student properties - hopefully you will find these observations helpful.

a. Be prepared to diversify.  We have always advocated a 'spread' of propery types.  Smaller properties - e.g. 1 bedroom flats are in great demand in many areas of the country. 

b. If you have a property requiring an HMO (houses in multple occupation) licence, be sure to get it as there are heavy fines, and prosecutions to be aware of if you don't.  Requirements for licences vary in different parts of the country and you should check with your local council. Large properties with more than 4 occupants require a licence in many council areas - some require one with only 3 unrelated occupants!

c. Contrary to what some will tell you, mortgages for HMO type properties are available but the maximum mortgage is usually restricted to 70% rather than the 75%  avalable on family type lets  - and the requirements of the lenders are very stringent.

d. Couple of tips to student property landlords which we have found from experience.  Be flexible!  If you have a seven bedroom property don't wait for a party of that number to arrive - if you have a party of 6 enquiring after a property be prepared to accept the situation.  Keep your standards high!Students are getting more particular!  The Universities are also 'vetting' landlords quite closely and advising students as to their rights and landlord obligations.  Make sure you have a properly drawn up lease and have all students on a single tenancy agreement. And what ever  else you forget - don't forget to register any bond you collect.  Fines for landlords who fail to do so are very high - and student tenants in particular are very wised up in this matter.

As we have stated above, your best plan if you are contemplating a buy to let purchase,  or remortgage of an existing investment property or have any questions about the 'why's and wherefore's' of the subject is to give us a call to discuss matters.

Despite what many tell you, with careful planning and heeding sensible advice, now is an excellent time to take advantage of the buy to let market. But be sensible - don't rush anything, look into your proposed project carefully, and remember above all else, you are looking at a long term market.  There will be ups and downs, peaks and troughs to negotiate - but oak trees still grow from little acorns.