Choosing a Best Lender

Choosing a Best Lender

With the default rate of buy-to-let (BTL) mortgages lower than
that of residential mortgages and with interest rates higher, the
BTL market has proved a remarkable success story for lenders. As
a result, competition for this business has increased greatly in
recent years with more and more lenders offering a BTL product
range. How do you choose between them?

MAINSTREAMOR SPECIALIST
For most high-street lenders, BTL is an add-on. Their core
business remains residential mortgages for owner occupiers. For
that reason, when it comes to BTL, they tend to be unduly
restrictive in one way or another. For example, a lender may insist
that some element of personal income, in addition to the rent, be
taken into account when calculating the mortgage to be offered.
Others may lend only to 80% or 75%. Some will limit to just a
few the number of BTL properties you may purchase or put a cap
on the total value of your portfolio. Few will help you if you have
had any credit problems in the past. All will be considerably less
generous in their calculation of the maximum mortgage you can
have. For the serious investor the specialist lender remains the best
choice.

FIRST-TIME BUYER
Most lenders will not offer a BTL mortgage to a first-time buyer.
They expect you to have your own residential mortgage already.
Only one or two will consider first-time buyers. It is vital to check
this point with the lender, directly or through a broker, before
embarking on a decision in principle request or
full application. You will not only be wasting your time but you
will also leave too many footprints on your credit file

INTEREST RATES
Surprisingly, the lowest rates are not generally best for the BTL
investor, for they usually come with unacceptable conditions. A
particularly low initial rate, for example, may tie the borrower in
for a number of years after the rate has changed back to the
higher variable rate. Changing to another lender during this
‘extended tie-in’ will incur a hefty penalty. In addition, as we shall
see, choosing the lowest rate available always means sacrificing the
maximum mortgage available. For most investors the priority is to
borrow as much as possible.

CHARGES
These vary widely from lender to lender. All have an arrangement
fee (which can be added to the loan), but this fee can range from
a few hundred pounds to as much as 1.75% of the amount
borrowed! Because it is added to the loan (few choose to pay it up
front), there is a tendency to disregard it. It is, however, a very
costly add-on as interest is also paid on this amount for the
duration of the mortgage.
In addition to the arrangement fee (sometimes called a completion
fee), some lenders charge a ‘mortgage indemnity guarantee’ fee, or
MIG. This is essentially an insurance premium paid by the
borrower, but for the sole benefit of the lender. If the lender
repossesses the property but fails to recover the full mortgage
amount on resale, the insurance company will pay the lender the
difference (the insurance company can then legally pursue the
hapless borrower to recover the sum it has paid out!).

MAXIMUM MORTGAGE
Most lenders agree that the rent should exceed the mortgage
interest (not capital and interest) by a certain amount. But they
differ on two important counts – the definition of ‘interest ’ and
the margin by which it should be exceeded.
For most lenders the ‘interest ’ is not the rate you pay (which may
be quite low initially) but the standard variable rate (much higher)
charged by the lender. A few lenders, however, base the
calculation on the pay rate. Since this will normally be lower than
the variable rate, the mortgage available is correspondingly
higher. In addition, some lenders require the rent to be 130%,
others just 125% of the mortgage interest. A few will come down
to 115% or 110%. Choosing a lender with the right formula is
crucial if you want the maximum mortgage possible.