It’s undoubtedly true that Buy-To-Let mortgages are harder to obtain today than in the frothy markets of a few years’ ago  - but that is good news, as it should put off the amateur investor who doesn’t do his or her sums right.

The factors you need to consider are:

The deposit. Most BTL lenders will want at least a 25% deposit, rather than the 10% or 15% level that was available a few years ago. Of course that’s not ideal, but this should emphasise even more the point that the key “profit defining” moment of the BTL transaction is the purchase price of the property, rather than the financing of the mortgage or the rental payment you get (of course both of these are important – but just not as important as the price you pay for the property in the first place).   

But back to the deposit. For the first-time investor, this is going to be the key expense, often soaking up nearly all the investment cash you will have saved up. (This is therefore another reason to get the purchase price as low as you can!). Depending on your investment strategy, this cash will be tied up in your property until the day you sell it, and is the key “opportunity cost “of a BTL investment. Opportunity cost simply means the cost of what you could have done with that deposit money if you hadn’t invested it in that specific property.  That money is precious: it could otherwise go into a low-risk savings account earning fractions of a percent (these days!) or - more usefully - be used to fund another BTL investment.    

Of course if you can get a BTL mortgage with a deposit that’s lower than 25%, then great, although please be aware that many of the “best” BTL mortgages out there have substantial up-front fees. You have to consider the cost of these fees very carefully in the overall calculations you make.

The interest rate. BTL mortgages, like all mortgages, come with a variety of interest options. Fixed rates over a 25 year or longer term are becoming more widespread (and copy the US mortgage model). They give you certainty of cost, but of course may seem very expensive when the bank base rate is much lower. Essentially, like all mortgages, you’re taking a view of what future interest rates will do. Those investors on variable rates today are looking very smug when compared with those people locked into high fixed rates, but memories are short, and not so long ago interest rates were well into double figures in the UK.

You need to make a decision as to whether taking an informed gamble (for that’s what it is) on a variable interest rate (as opposed to a fixed interest rate with certain repayments) is worth the risk for the anticipated return.  Please remember that a fixed rate may also be beneficial in terms of being cheaper if the base rates above it, and even if you assume your fixed rate stays above the base rate for the length of your property ownership, then simply calculate how much you may have “lost” in having to pay extra interest payments. If you do a realistic assessment of that, then weigh up that potential cost against the expected return on your entire BTL investment. For some investors, the downside of having to worry about a variable interest rate is just a distraction they don’t need, but every situation is different, and you’ll need to come to a decision on fixed versus variable.    

Interest only versus interest and capital repayments. Many BTL investors take out interest only mortgages, since they plan to sell the property in a few years’ and the capital repaid at that point will be relatively small. That’s certainly true, but for others there is a psychological gain from knowing that some of the original capital is being paid off, and if the worst came to the worst or if you decide to keep the property for a very long time, then after 25 years or so the entire capital borrowed would be paid off.  

Upfront fees. Can be substantial and obviously have to be factored into calculations on your BTL investment return. Don’t forget exit fees (i.e. fees payable to lenders for redeeming your BTL mortgage early).

What decisions you make on each of these factors in BTL financing is down to your personal choice, but please do spend some time on this, and if you are unsure about anything it would make sense to get advice from a finance or mortgage professional.

The first draft of your BTL Strategy

Once you have covered the core planning steps (and its an iterative process, with findings on the property market in a specific area feeding into your financing options, and financing parameters setting limits on which properties you may be able to buy etc), then the next step is to put an initial strategy down on paper, based on the information you’ve gathered so far.

When you’ve done a first version, share it with people you trust. Take their feedback on board, but do filter out comments based on incomplete or amateur views on BTL investments. If you can get feedback from an experienced BTL investor, that’s a huge bonus. Filter and iterate your plan (doing more research as needed) until you think it is robust and in a finalised form.

Then put it way for a couple of weeks. Clear your mind of BTL thoughts. Only after two weeks has passed should you read your plan again. Does it still make sense? Are you sure you want to go through with it?

 If so, then the hard work will truly begin …

Good luck!

The Buyto.com team