Buy-to-let mortgage lenders are shrinking their borrower deposit requirements – even in the face of a slowing housing market.
Lower-deposit mortgages are becoming increasingly popular as a way for lenders to try and tempt landlords onto their books as tax changes continue to cause customer numbers to dwindle.
This week Vida Homeloans became one of the few lenders to offer an 85 per cent loan-to-value buy-to-let mortgage, with the deal overtaking a handful of 80 per cent loan-to-value deals to become one of the highest LTV products on the market.
This leaves landlords with just a 15 per cent buffer against negative equity if things go wrong.
David Hollingworth of broker L&C Mortgages
For those who have 5 per cent more to put in as a deposit, rates from other lenders are significantly cheaper.
The Mortgage Works, Nationwide’s buy-to-let arm, has an 80 per cent loan-to-value two-year fixed rate deal at 2.99 per cent, albeit with a £3,480 fee.
Clydesdale Bank beats this with the same terms and rate but a smaller fee of £1,999.
For those who want to opt for a smaller fee but a higher rate, Ipswich Building Society has a two-year fix at 80 per cent loan-to-value with a fee of £1,149 at 3.15 per cent, while Virgin Money has a similar offering with a fee of £1,695 at a rate of 3.24 per cent.
And for those looking to lock in for five years, which will likely be the majority of landlords, Clydesdale Bank has a five-year fix at 80 per cent loan-to-value with a £1,999 fee with a rate of 3.39 per cent, while Hanley Economic offers a similar product with a rate of 3.49 per cent with a fee of £1,534.
Five-year fixed rate mortgages are historically cheap, but a few lenders even offer up 10-year fixed rate deals for landlords looking for the longest period of security.
There are currently no 10-year fixes for landlords with less than a 30 per cent deposit to put in.
Should you take one?
The advantage of taking a higher loan-to-value mortgage is obviously the smaller deposit required, but it does come with a set of disadvantages.
The first is the price difference. Even when you factor in the fees, the rates available in the 80 per cent loan-to-value bracket would offer a prospective borrower significant savings.
Landlords will also need to assess whether the rental income will be adequate to cover the mortgage amount.
For example, on a £250,000 mortgage, on the group’s five-year fix the landlord could expect to pay £1,050 a month in interest.
Thanks to new rules from the Bank of England buy-to-let mortgages are now only approved if the landlord can demonstrate their rental income would cover their mortgage payment by a ratio known as an ‘interest coverage ratio’, usually 145 per cent.
On the example above this would mean monthly rental income would have to be £1,522.50 a month at a minimum.
That said, Vida is one of only a few so-called ‘non-bank lenders’ that are not required to adhere to the Bank of England rules on buy-to-let affordability.
This means they don’t have to bump up their interest coverage ratio to 145 per cent.
In practice, they require rental income to cover the mortgage by just 125 per cent for basic rate tax payers or limited companies, meaning a monthly rent of £1,312.50. They require 140 per cent for higher rate tax payers.
Finally, an 85 per cent loan-to-value mortgage provides less of a buffer against negative equity than an 80 per cent one.
This means if house prices fall dramatically, there is less equity protecting the landlord from owing the lender more than the property is worth.