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What could higher Buy-to-Let mortgage costs mean for landlords?

What is a Buy-to-Let mortgage? 

Landlords can take out a Buy-to-Let mortgage to buy properties for their rental businesses if they need help to buy the property. Buy-to-Let mortgages are different from regular mortgages in the following key aspects: 

Interest-only 

A Buy-to-Let mortgage is usually an interest-only loan, which is helpful in the short term as borrowers only need to pay the monthly interest.  

Borrowers need to have a plan for paying off the mortgage at the end of the term. For instance, they can repay the mortgage with the sale of the property or by using savings. 

Higher minimum deposit 

The minimum deposit for a Buy-to-Let mortgage is usually 25% of the property’s value. However, depending on the lender, it can vary between 20-40%.  

Additionally, the borrower must have a good credit score record, and the expected rent will usually need to cover between 120% and 150% of the interest payments.  

A Buy-to-Let mortgage with a monthly interest payment of £1,000 would require a monthly rent between £1,200 and £1,500.  

Higher Fees

Arrangement Fee: Some lenders offer loans without fees, while others charge a fixed fee of around £1,500 or even a percentage of the loan amount. 

Mortgage exit fees: Landlords and property investors with a Buy-to-Let mortgage may face considerable additional costs if they want to pay off the mortgage early; this is known as Early Repayment Charges (ERCs).  

Higher interest rates: Interests on Buy-to-Let mortgages are typically higher than on a regular mortgage. A borrower will have access to lower interest rates if the deposit is 45% or more of the property’s value. 

How do rising interest rates affect landlords and property investors?  

The sky-high inflation rate – which hit a staggering 11% this past November– has led the Bank of England to raise interest rates by 0.5 percentage points from 3% to 3.5%.  

 
Buy-To-Let properties are typically leveraged; consequently, people with variable-rate mortgages, including landlords, will face higher monthly repayments. Landlords with a fixed-rate deal could see much higher rates after their current agreement expires.  

 
Fixed five-year UK mortgage rates have increased from less than 2% to more than 6% this year. As Buy-To-Let mortgages are mostly interest-only, they do not offer the possibility of some relief through lower capital repayments. 

Overall higher monthly mortgage costs will negatively affect the net rental yield of any leveraged Buy-to-Let investment if the cost is not passed on to the tenant.   

Rising mortgage interest rates and house prices 

The supply and demand imbalance in the UK’s residential market is a strong factor behind the appeal of residential property as an investment, especially in highly sought-after areas.  

 
There’s been incredible house price growth in the past two years, resulting in a record average house price of £296,000 in August 2022 and £295,000 in September 2022, according to the latest release from the ONS.  

Although house prices are not certain to fall in 2023, rising interest rates add downward pressure on house prices.  

 
The Bank of England has recently warned that landlords could be paying up to £4,000 more for their Buy-to-Let mortgage in 2023.  

 
The report from the Financial Policy Committee highlights that landlords will need to increase their rental income by 20% to meet higher mortgage rates. But, especially in areas where affordability is more stretched, passing the increased rates on to tenants could be difficult.  

 
According to a recent ONS lifestyle survey, almost a third of respondents have difficulty paying their rent on time.  

 
Finding themselves between rent affordability and higher monthly costs, some landlords might choose to sell properties placing additional pressure on house prices to drop.  

 
Buy-to-Let properties that are leveraged are more vulnerable to property price drops. Regardless of how much or how long the price decrease lasts, a price drop in the market would put this type of investment portfolio at a real risk of negative equity.  

How can CrowdToLive® equity-based investment platform help property investors?  

CrowdToLive® allows easy access to 5%-7% above the market net yield unleveraged investment opportunities that are interest-free, fully managed and tenanted.  

Diversification  

Property investors gain the potential for greater portfolio diversification within the UK’s residential market due to an affordable minimum investment of £10,000 per live property on the platform.

As investors build their portfolios, they can achieve high diversification in regions, cities, types of properties, and tenants.  

Due diligence

CrowdToLive® follows a due diligence process before residential property opportunities go live on the platform, carrying out a RICS (Royal Institute of Chartered Surveyors) survey Level 2 of the house to ensure the purchase price and the property condition make for a smart investment.  

A stable tenant 

The tenants enter a Part own, Part rent structure where they own at least 5% of the property and pay rent, indexed to inflation, on the part of the property that they do not own.  

In CrowdToLive’s property investment portfolio, the lowest ownership is 5% of the property, whilst the average ownership is 17.3%.  

In every property investment opportunity with CrowdToLive®, there is a stable tenant interested in paying rent on time and taking diligent care of the property. The investment’s net yield can be higher than traditional Buy-to-Let because of a lower risk of void periods or defaults on rent payments.  

The initial minimum investment of 5% of the house price from the tenant also serves as security against potential unpaid rent and legal costs.  

CrowdToLive® requires tenants to have an Experian credit score of Good or Excellent and provides full legal conveyancing to assess the tenant’s affordability.  

Part of our mission is to help families move into their homes without a mortgage. The tenant can staircase and purchase more property shares every three months.  With each staircasing, there is a guaranteed above-market capital gain for investors, based on the latest house price index data published by HM Land Registry plus 1%. 

If you want to learn more about creating a more stable and diversified portfolio through property investment, feel free to contact us about shared property investment opportunities.    

Please click here to arrange a free, no-obligation call, or give our friendly and helpful team a call at +44 203 542 1452. 

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