How to find the best 90% LTV Buy to let mortgages

Buy to let mortgages are for landlords who wish to buy a property to rent out. Find out how to find the best 80% buy to let mortgage to suit your needs.

If you’re keen to buy a property as an investment and wish to rent it out, you will need to take out a specific home loan known as a buy to let mortgage (BTL). 

COVID 19 update

Due to the coronavirus pandemic, most 90% LTV buy to let mortgages are currently unavailable, with 85% LTV being the closest mortgage product on the market.

But what if you only have a small deposit? Is it possible to find a buy to let mortgage with a 10% deposit? 

It may be worth waiting for the market to stabilise. With redundancies on the rise and the economy unlikely to return to pre-pandemic levels anytime soon, you may find it difficult to launch a letting venture at this time. 

What is a 90% Buy to let mortgage?

Having a deposit of 10% of the value of the property means that you will need to borrow the remaining 90%. This type of loan is known as a 90% loan to value (LTV) mortgage.

What does Loan to value (LTV) mean?

The loan to value ratio = (how much you wish to borrow/how much the property is worth) x 100.

So, if you wanted to buy a house for £400,000 and had 10% (£40,000) as a deposit, you would need to borrow the remaining £360,000.

The loan to value ratio would be:

360,000/400,000 = 0.9

0.9 x 100 = 90

So, the LTV ratio in this case is 90%.

How do buy to let mortgages differ from residential mortgages?

First and foremost, while lending money to borrowers is always a risky business for mortgage providers, this is amplified when it comes to buy to let mortgages. 

This is because, unlike a home you plan to live in yourself, this is a property that you will be renting out to a third party. There is no guarantee you will find good tenants, that they will pay enough rent or that you won’t end up with an empty house for long periods. And all of this could add up to you being unable to meet your mortgage payments.

For this reason, buy to let mortgages tend to be harder to qualify for, with many lenders insisting that you are over 25 (occasionally 21) own your own home, that you earn over £25,000 a year and that the mortgage term will end before you reach your 70th birthday.

While most residential mortgages are taken out as repayment mortgages, almost all buy to let mortgages are interest only. This means instead of paying off some interest and a bit of the capital each month, you are only paying the interest and will need to have an alternative savings plan in place to pay off the capital when the term ends. 

Landlords that hope to pay off the capital by selling the house when the term ends could end up in a difficult situation should property prices fall.

Interest rates on BTL mortgages tend to be higher and you will typically be expected to put down a larger deposit to provide extra security for the lender (although it is usually possible to find a buy to let with 10% deposit). 

While the government has scrapped Stamp Duty for properties up to £500,000 until March 2021 in a bid to ignite the housing market, similarly priced buy to let and second property purchases are still subject to Stamp Duty at 3% in England and Northern Ireland. You can find out how much you could pay with this stamp duty calculator.

Incidentally, the rules regarding tax and buy to let property can be complicated, so you can find out all you need to know about BTL and tax in this guide

Most buy to let lending is also not regulated by the Financial Conduct Authority (FCA) as it is classed as commercial, not consumer lending.

Rental and buy to let yield

Lending on buy to let mortgages is also worked out differently to standard residential mortgages. 

With a residential mortgage the sum you can borrow is calculated as a multiple of your earnings, but with a buy to let mortgage, providers look at the rent you could expect to earn. This is referred to as your rental yield.

Lenders typically require the rental income to be 25% higher than your mortgage payment, making it 125% of your mortgage payments. 

So, if your mortgage was £400pcm, you would need the rent to be £500pcm.

Credit score

All of the extra risk involved with BTL mortgages makes lenders extremely diligent when deciding who will qualify. 

Unsurprisingly, your credit score will form an important part of their vetting, so it is essential to check your credit report from Experian, Equifax and TransUnion before applying. This can be done for free and means you can spot and amend any anomalies.

Which type of 90% LTV buy to let mortgage should you choose?

When searching for buy to let mortgages with 90% LTV you’ll find the usual suspects available, such as fixed rate, discounted variable rate and tracker mortgages.

Which you choose will depend on a number of factors.

If you are a first time landlord and stretching yourself to take out a buy to let on top of your residential mortgage, the security of a buy to let fixed rate mortgage may be a good option as you know your payments will not rise during the term.

However, interest rates are historically low at the moment at just 0.1%. 

Buy to let variable rate mortgages, which are usually fixed at a set percentage below the lender’s standard variable rate (SVR) are correspondingly low, making them an attractive option. 

Buy to let tracker mortgages, which typically track a fixed amount above the Bank of England base rate are also extremely low. What’s more, if you believe interest rates will drop even further, they may get cheaper still.

However, with both discounted variable and tracker mortgages, should the base rate rise, so too will your payments, as most lender standard variable rates loosely track it too. 

This level of uncertainty can prove difficult to budget for. Indeed, if rates continue to rise, you might risk not being able to make your mortgage payments at all.

Cap and collar deals

If you do choose any type of variable rate mortgage, it could be well worth looking for capped deals. 

With this type of mortgage product, a ‘cap’ is placed on the mortgage rate. Should the base rate rise above this cap, your mortgage rate will be prevented from following suit, a useful safeguard in today’s low interest climate.

On the other hand, some lenders employ a ‘collar’ to their rates, meaning that should the base rate drop below the collar, your mortgage rate will not follow it. This, rather disappointingly, is to prevent mortgage rates going into negative interest, which would mean your lender would have to pay you interest!

Could I take out a 90% LTV buy to let mortgage?

Of course, while this may be a lot of money to us, to a mortgage lender a 10% deposit on a buy to let mortgage is far from impressive, and if you are a first time BTL buyer, you will usually be expected to stump up 25% or more. Established landlords, on the other hand, are likely to be offered more competitive deals.

That said, finding a buy to let 90% LTV mortgage is not impossible but you will need to be prepared to pay higher interest rates than those with larger deposits. 

There are also very few lenders that offer 90% LTV buy to let mortgages, meaning you will have less choice in which to go for.

There are many more 85% and 80% LTV products available and more still at 75% LTV. The lower your LTV, the lower the interest rates and associated fees.

Where can I get a buy to let mortgage with 90% LTV?

When you are looking for a buy to let mortgage with a 10% deposit, not only will you face hefty fees and charges, but you may also be subject to a higher lending charge.

For this reason, it is vital to work out how much your mortgage will cost for the entire discounted term, including the fees and charges. You can also see the actual cost over the entire term of the mortgage as the Annual Percentage Rate of Charge (APRC). 

Comparison websites are a good place to start your search as not only do they show the duration and maximum LTV for different lender’s deals, they list all the different fees payable on each mortgage product. By listing similar products side by side, comparison sites save you trawling the internet to check numerous lenders’ websites. 

You may find that the more expensive interest rate with the cheaper upfront charges costs less than the cheapest mortgage deal with high fees in the long run.

Don’t forget to check a few comparison sites to ensure you don’t miss any lenders.

Brokers

As mentioned, the number of 90% LTV BTL mortgage deals are few and far between and you may find it difficult to locate one you qualify for. 

In this case it may be worth contacting a mortgage broker. Not only will they assess your situation, a good broker should have the knowledge and experience to direct you to the most suitable products, as well as lenders that are most likely to accept your application. 

Be aware though that most brokers charge for their service so be clear on how much the advice will cost.

How can I drop down an LTV band?

As you’d expect, those looking for buy to let mortgages with 90% LTV will pay the highest interest rates, and the arrangement fees are more expensive too. 

Rates tend to get cheaper as your deposit increases, and the cheapest BTL mortgage rates are saved for those holding a 40% deposit (or equivalent in equity) making their LTV ratio 60%. 

If you were looking to purchase a property for £400,000, for example, and had £40,000 in cash for a deposit, you would have an LTV of 90%. Not only are there very few lenders offering 90% LTV mortgages, the interest rates they charge are very high too.

If, however, you could raise another £20,000 from savings to give you a deposit of £60,000, you could look at 85% LTV mortgages. Not only are there many more lenders to choose from, with more competition the best rates tend to be significantly cheaper and often boast lower arrangement fees too, which could save you thousands in the long run.

And remember, if house prices should continue to increase, by the time you come to remortgage your property will have gained in value, which may help you naturally drop into a lower LTV band.

COVID 19 Effect

The current coronavirus pandemic has had a profound effect on the housing market, making lenders even more cautious regarding the risks they will take when lending money. 

Nearly all lenders have currently pulled their 90% LTV buy to let mortgages from the market as a result, requiring borrowers to have at least a 15% deposit, or ideally more. We hope that when things calm down the buy to let market will see the return of 90% LTV buy to let deals.


8th October 2020