Gerry Fitzgerald has built a multi-million pound property portfolio which he manages himself. As a former Independent Financial Adviser he is further qualified to offer insight and guidance on the buy-to-let mortgage market. With long experience, both of using letting agents and of managing properties himself, he can speak with authority on the benefits and pitfalls of both approaches. He also runs a successful holiday letting business.
Buy-to-let (BTL) lenders will always require a deposit. This is usually 15%, with a few lenders accepting 10%. There are no 100% BTL mortgages. If you have no ready funds available, therefore, you will have to borrow the deposit. But how do you do this?
If you already have a residential mortgage on your own property and there is sufficient equity in the property (the difference between its value and the outstanding mortgage), you may be able to borrow additional funds from your existing lender. This is undoubtedly the quickest and the cheapest way to raise the cash you need. However, there are several hurdles to leap:
- First, your earned income must be sufficient to satisfy the lender that you can service the extra amount.
- Secondly, your lender will want to know what you want the extra cash for. Some residential lenders will not countenance borrowing for the purpose of raising the deposit for another purchase. They fear you may be getting in over your head.
- Thirdly, your lender will carry out a new credit check to make sure nothing has changed since your original mortgage was arranged. If your credit rating has changed for the worse (e.g. defaults on credit card payments or county court judgments), this could pose problems, not only making the extra borrowing impossible but also alerting your lender to your current financial problems.
If you don’t already have a mortgaged property (i.e. you are a first-time buyer) and you have no cash available for a deposit, the problems you face are considerably greater. First, leaving aside the missing deposit, the vast majority of BTL lenders require you to have an existing residential mortgage before they will consider you for a BTL loan (see below). Secondly, the possible route to the elusive deposit in this case is slow and uncertain. This is what you need to do:
- First, buy a property for your own use on a 100% residential mortgage (100% mortgages, though rare, do exist for residential purchases).
- Secondly, the property you buy should be one that can be improved, thus increasing in value (typically requiring some or all of the following: new bathroom, kitchen, central heating, double glazing).
- Finally, remortgage with another lender to raise the cash on the new increased value of the property you have bought and improved.
Simple? Not as simple as it looks. Lenders will advance 100% (or even more) but on very stringent criteria. The borrower:
- must have an impeccable credit rating
- should be employed rather than self-employed
- should be well out of any probationary period
- should have good prospects of advancement
- should have a sufficiently high income to satisfy the lender’s income requirements for a 100% mortgage.
As you can see, such loans are not available for everyone.
If the property you buy obviously needs improvement, it may well be possible to increase its value by carrying out the improvements. But how will you pay for this if you have no available cash? Moreover, the sort of improvements that can have a significant impact on the value are, by definition, expensive – new kitchen, new bathroom, central heating and double glazing.
Finally, if all these obstacles are overcome, a new mortgage needs to be raised on the property you have improved. Here you will encounter an unexpected problem – the loan-to-value ratio (LTV) applicable to remortgages. You may have had a 100% mortgage for the original purchase but few lenders will advance more than 90% on a remortgage and none will do 100%. Care needs to be taken that the projected ‘new value’ of the property will be sufficient to take this into account. Also, bear in mind that the new mortgage has built-in costs – valuation fees, legal costs, mortgage arrangement fees and possibly broker fees. These must also be budgeted for.
In practical terms, 100% finance for a BTL mortgage is possible only for the investor who has an existing residential mortgage. For the first-time buyer it is a pure myth.