For those who want to purchase a property to let, a buy-to-let mortgage is a good option to consider.
When scouring the housing market for such a mortgage, you may encounter the term LTV mortgage.
Measured in percentages, an LTV mortgage is the loan amount against the property’s value that is used to purchase or remortgage a property.
The borrower will put down a deposit. The remaining amount is the loan, which combined with the deposit makes up 100% of the final purchasing price.
Let’s take a deeper look at LTV buy-to-let mortgages and how high LTV loans can aid a buy-to-let investor.
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Defining The Loan-To-Value Ratio
LTV stands for Loan-To-Value, a percentage that defines the value of a property being covered by the loan.
The loan-to-value ratio is calculated by dividing the borrowed amount by the property value. The result is then multiplied by 100 to receive the percentage value of the LTV.
So, in an 80% LTV buy-to-let mortgage, the borrower agrees to deposit 20% of the property value upfront, making 80% the loan amount.
Let’s say you wish to purchase a house valued at £500,000. With a 75% LTV mortgage, you would deposit £125,000 upfront, with £375,000 being the loan amount.
Buy-To-Let Mortgages And Loan To Value
LTV has a critical role to play when a buy-to-let property is being purchased. This ratio helps lenders decide whether or not the mortgage is worth approving or not. After all, a higher LTV ratio makes the mortgage riskier for the lender to approve.
Thus, an LTV mortgage as high as 90% can be difficult to secure, especially if the investor/borrower has little experience as a landlord. The deposit requirement is usually around 25%, making the LTV limit 75%.
That said, in rare cases, an LTV mortgage as high as 90% can be granted without the investor being particularly experienced as a landlord.
In reality, this high an LTV ratio for a buy to let mortgage is only available to existing landlords looking to move their current mortgage onto a new deal and the 90% LTV has occurred because of a negative equity situation.
Low deposit buy to let mortgages may allow the landlords sufficient cash flowing that allows them to be prepared for any emergencies like urgent repairs.
From the borrower’s perspective, a relatively low LTV would mean that they would need to pay a large sum as the deposit amount initially. Depending on personal circumstances, this could prove to be difficult.
High LTV affords landlords plenty of flexibility, particularly for experienced landlords. They can safely deposit a manageable amount of money at a lower personal risk on a property that meets their requirements.
The Lender’s Criteria for High LTV Buy-To-Let Mortgages
The LTV ratio is just one aspect of letting out the property. There are several eligibility requirements that lenders expect applicants to meet before they let the property out. These may include:
- The applicant must be between 25 and 75 years of age before the mortgage term ends
- They take out a minimum loan of £50,000
- The loan term falls between five and 35 years
- Applicants have a good credit record
- The property has eight bedrooms at maximum (Anymore could be considered a House in Multiple occupation).
- Documentation related to the applicant’s identity, current address and income
- Planning permissions, if applicable
At the end of the day, lenders are generally more careful when lending out a high LTV against a property.
They aim to minimise the risk of the loan going into default, as the equity built up in the property is not particularly high.
The Types Of 90% LTV Buy-To-Let Mortgage
When searching for a 90% LTV buy-to-let mortgage, you may find a fixed-rate mortgage, discounted variable-rate mortgage and tracker mortgages available but as discussed realistically there is unlikely to be any products available.
Choosing between these three depends on several factors, including interest rate fluctuation, experience as a landlord and the borrowers personal circumstances at the time of application.
Here’s a brief discussion of all three mortgage types and what they have to offer.
1. Fixed-Rate Mortgage
As the name suggests, a fixed-rate mortgage is a loan that has a constant rate of interest for a defined period. This time period may last for two, five or ten years usually.
Such mortgages require the same monthly repayments, regardless of changes to the base rates defined by the Bank of England. This makes them more financially secure than variable mortgages, as you won’t be burdened by a sudden increase in monthly repayments.
Fixed-rate mortgages are good for first-time landlords who want a buy-to-let property in addition to their residential mortgage.
While they may end up being a little more expensive than variable-rate mortgages or tracker mortgages, they do maintain financial stability for such homeowners.
2. Discounted Variable-Rate Mortgage
The interest rates of these mortgages fluctuate based on the economic status of the country and the base rates defined by the Bank of England.
Currently, the base rate defined by the Bank of England is at 4.25%, so expect variable mortgage rates to be around this value.
For buy-to-let properties, the discounted variable-rate mortgages are fixed at a percentage under the Standard Variable Rate (SVR) of the lender for a certain period. This period may last usually anywhere from two to three years, depending on the lender and the property.
While the interest rates of a discounted variable-rate mortgage may vary, the discount itself does not. It’s usually around 2%, and based on the lender’s SVR, your monthly repayments may increase or decrease.
Based on the economic status of the country and the base rates set by the Bank of England, this mortgage may be a good option. However, should the base rates rise higher than what would be ideal, you may end up with a high monthly interest to pay.
And to prevent this, there are a couple of safeguards that high LTV buy-to-let mortgages employ. With variable rate mortgages come cap and collar deals, where a “cap” or a “collar” may be placed on the mortgage rates.
If the base interest rates defined by the Bank of England grow higher than the cap, your mortgage will not rise above the cap. This acts as a safety net for the borrower, preventing them from having to pay a large sum as a part of their monthly repayment.
Additionally, lenders may apply a collar to prevent interest rates from falling below a certain percentage. This safeguards that the mortgage rate does not go into negative interest, where the lender would have to pay the borrower interest.
3. Tracker Mortgages
A tracker mortgage follows, or “tracks”, the base rate set by a different entity. The amount of interest owed is calculated by adding a certain percentage to the base rate defined by this entity. Usually, this entity is the Bank of England.
Much like variable rate mortgages, tracker mortgages can also change based on this base rate. Should the base rate increase beyond a certain amount, the extra payment amount goes towards the increased interest charge by the tracker.
This ends up contributing nothing towards your mortgage debt, which can be a setback if the entity used for the tracker rate goes up.
There is a high level of uncertainty associated with tracker mortgages, but they can be a good option if interest rates continue to be low.
Taking Out A 90% LTV Buy-To-Let Mortgage
There are very few instances where a 90% LTV buy to let mortgage will be available for a buy to let investor. If you are an established landlord, finding one may be easier for you.
The caveat to 90% LTV buy-to-let mortgages is that interest rates associated with these properties are usually higher than those with a lower LTV ratio.
Thus, there are more mortgages landing at around 75% LTV that balances the interest rates and the deposit amount fairly well.
No matter the mortgage type you choose, a 90% LTV buy-to-let property will incur high fees and charges. Additionally, you may have to pay a higher lending charge for such properties.
So, it’s crucial to calculate the mortgage cost for the entire term, along with the discounted period.
An experienced mortgage broker will definitely help you in this endeavour, allowing you to view the duration and the maximum LTV for several lenders.
You can check the various payable amounts with your broker on each mortgage to help you make the final decision.
At the end of the day, based on the property and your financial status, high interest rates with low deposits may be the best option.
While realistically very difficult to secure, 90% LTV buy-to-let mortgages may be a good option for landlords looking to invest in properties without paying much upfront.
The high flexibility afforded by a high LTV mortgage is quite beneficial in both the long and short terms.
It’s important to note that high LTV mortgages incur hefty fees and interest rates. And based on the mortgage, any advantage you yield from a low upfront cost may be negated by these high payments over time.
Be sure to consider all options before you make the final decision on a high LTV buy-to-let mortgage.
**A buy to let mortgage will be secured against your property.
Some types of buy to let mortgages are not regulated by the Financial Conduct Authority.
All content is written by qualified mortgage advisors to provide current, reliable and accurate mortgage information. The information on this website is not specific for each individual reader and therefore does not constitute financial advice.