Five-year buy-to-let mortgage means landlords qualify with lower rent

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Is this a buy-to-let loophole? New mortgage means landlords can qualify with less rent WITHOUT locking in for a full five years

  • New deal from Foundation Home Loans will let landlords leave for free after three years but still allow them to qualify with a less stringent affordability test  
  • Affordability tests are not as strict on terms of five years or more, meaning landlords can borrow more taking this type of deal instead of a shorter term
  • The rates are on the expensive side, but offer flexibility on term length 

Landlords struggling to make the maths work on a new mortgage are being offered the chance to qualify for the easier rules a  five-year fixed rate delivers – but without locking in for that full period.

Strict rules limiting the amount landlords could borrow on a buy-to-let mortgage came in almost two years ago, but now one lender has come up with a product that eases the amount of rent a landlord must earn without locking them in for five years. 

Since 2017 landlords have had to choose between committing to a fixed term mortgage deal for at least five years or facing stringent affordability rules which limit how much they can borrow in relation to their rental income.

The new stricter affordability rules only apply to fixed rate terms of less than five years

The new stricter affordability rules only apply to fixed rate terms of less than five years

But a new five-year fix from lender Foundation Home Loans allows borrowers to leave after three years without facing any early repayment charges – effectively giving them the flexibility of a three-year fix without the tougher affordability rules.

The deal comes in two forms, up to 65 per cent loan-to-value at 3.30 per cent and up to 75 per cent loan-to-value at 3.55 per cent – both quite expensive compared to existing deals on the market.

So who might this deal be right for, and is it worth the extra cost?

Why will this allow landlords to borrow more? 

Five-year fixes have become one of the go-to mortgage types for landlords in recent years as less stringent affordability tests on these deals mean borrowers can take out larger loans.

A lender assesses whether a potential borrower is suitable for a loan by putting them through what is called a ‘stress test’. 

As part of this the borrower has to be able to rent out the property for a minimum amount, which is proportionate to the size of the loan taken.  

The rules, brought in by the Bank of England two years ago, force lenders to require more rental income cover than they did previously to qualify for a mortgage.

Shorter term mortgages are now only approved if the landlord can demonstrate their rental income would cover their mortgage payment by a ratio of 145 per cent, in the event that their mortgage rate went up to 5.5 per cent. 

This is a significant jump from the previous norm applied by lenders, of 125 per cent rental coverage at a lower rate.

But, the Bank of England’s stricter rental income rules only apply to mortgage deals that are fixed for fewer than five years – the more onerous income requirements don’t apply when mortgage payments are fixed for five years or longer. 

As there are no early repayment charges after three years on Foundation’s new deals, they provide the flexibility of a shorter term fix, but because they are five-year deals, they would also mean landlords don’t need to pass the more onerous stress tests. 

For example, on a comparatively priced two-year fix, for a £150,000 mortgage a landlord would need to be able to rent the property at £996.80 per month.

However, because lenders can be more generous with their stress tests on five-year fixes, on a five-year deal the landlord may only need to rent the property for £859.38 a month. 

This means they can take out bigger loans without being as restricted by the amount of rental income they can expect. 

While the deals may offer more flexibility, there are far cheaper five-year fixes out there

While the deals may offer more flexibility, there are far cheaper five-year fixes out there 

Foundation’s deal is available to portfolio and non-portfolio landlords, including those financing through a limited company, and can only be accessed via a broker. 

The deal is part of the lenders ‘tier one’ group of products however, meaning that borrowers will need a near-perfect credit record to qualify. 

How does it compare?

Though the deal might give landlords more flexibility, this does come at a cost.

New landlords currently have more choice than ever when it comes to the number of deals on offer, and average buy-to-let mortgage rates across the board are dropping.

The average five-year fixed rate buy-to-let deal has dropped from 4.45 per cent four years ago to just 3.38 per cent today, according to Moneyfacts.

As such there are currently some very cheap deals on offer that would cost considerably less than Foundation’s new mortgage.  

The Mortgage Works has a five-year fix at 65 per cent loan-to-value at just 1.99 per cent – but it does come with a hefty fee of £2,574.

On a £200,000 mortgage taken over 25 years this deal would end up costing £847 a month compared to £980 for Foundation’s deal. Over the life of the mortgage this difference would account for an extra £37,382 in interest payments.

Accord Mortgages also has an attractive rate in the same loan-to-value range of just 2.04 per cent, but this deal also comes with a large fee of £2,294.

At 75 per cent loan-to-value, Foundation’s deal doesn’t fare much better. Virgin Money has a five-year fixed rate in this loan-to-value range at 2.12 per cent, with a £1,994 fee.

Similarly The Mortgage Works has a 75 per cent loan-to-value five-year fixed rate deal at 2.14 per cent with a fee of £2,574.

On a £200,000 mortgage taken over 25 years this would cost £861 a month compared to £1,007 for Foundation’s deal. It would also save the borrower some £40,990 in interest over the course of the loan. 

Foundation’s deals are expensive, but what about the early repayment charges? As attractive as this feature is, it’s not unique.  

Godiva Mortgages offers a five-year fix at 2.55 per cent up to 75 per cent loan-to-value, or 2.79 per cent for portfolio landlords. Both deals come with an arrangement fee of £1,999.

Neither of these deals have any early repayment charges and, instead, carry an exit fee of just £125. This means landlords could technically sell up after just a year for just £125. 

The rate is also far more competitive than Foundation’s. At 2.79 per cent for a portfolio landlord, a £150,000 Godiva mortgage taken over 25 years would cost £695 a month, compared to £755 with Foundation’s deal.  

On top of this, you can make unlimited overpayments without incurring any extra costs. 

David Hollingworth, of mortgage broker L&C, said: ‘Of course most fixed rates will tie the borrower in for the duration of the fixed rate period and that needs to be factored into the decision to take a medium to longer term fixed rate.

‘This product looks to offer the opportunity to lock into a rate but only be tied to that rate for the first three years, effectively opening up the option to review the product at that point and choose whether to continue, switch to another deal or potentially even sell the property without incurring a penalty.

‘That could be a useful feature for some landlords but there is a price attached to that. The rate on this deal is higher than Foundation’s standard five year fix – as you’d expect.’ 

Ultimately whether or not this deal will save a landlord money will depend on their individual circumstances, but for those who are attracted to the lack of early repayment charges, most would likely be better off taking Godiva’s five year fix instead.

Speaking to an independent broker in these situations can help. You can also find all the most competitive buy-to-let mortgages for yourself using This is Money partner L&C’s free search tool.  

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