Buy-to-let Mortgages and Remortgaging in the Current Market: What to Know

The UK’s buy-to-let market has dominated headlines over the past few years as sweeping changes to the rental sector has affected landlords. One of the most significant legislative changes was the gradual phasing out of a landlord’s ability to offset the interest paid on their buy-to-let mortgage against their income generated from their rental. The changes were implemented in 2017 and were phased out gradually until 2021. Landlords have also been hit by economic factors like higher energy costs, the impact of inflation on tenants and rising interest rates – on top of the tax relief changes.  

However, demand remains strong – especially sought-after areas like prime central London. Average rental yields in Prime Central stood at 3.72% in October 2022, (the highest in over a decade), with rents increasing by 17.1% between October 2021 and October 2022. 

Challenges For Landlords

• Mortgage rates are likely to have risen significantly since you took out your buy-to-let mortgage, and you are faced with refinancing at much higher rates, cutting your net rental income
• Lenders usually want to see ‘headroom’ of between 125%-145% what you will receive in rental income and the monthly cost of your mortgage. As interest rates have risen, this margin may have been reduced, and you may be struggling to meet affordability criteria if you need to refinance. This may effectively see you forced to remain with your current lender, even though there are more competitive buy-to-let mortgage deals available
• You may be finding it challenging to access the best products available on the market as buy-to-let mortgage lenders become more cautious in their approach to lending and have more stringent lending criteria

While some landlords are looking at selling their portfolios, the top of the rental market tends to operate differently than the middle market, and as such, there are still plenty of opportunities. Rental demand in Prime Central London continues to grow, for example, and owning buy-to-let property can remain lucrative, provided you are maximising your returns with the best mortgage possible. If you need to refinance a buy-to-let mortgage this year or you are looking to buy a buy-to-let investment, here are two paths we can consider as we arrange bux-to-let mortgages to help you get the best rates available: 

Consider Top Slicing

Some buy-to-let mortgage lenders will offer top slicing for buy-to-let mortgages, which allows for a larger degree of flexibility with regards to the amount you can borrow. Exploring top slicing is especially useful if you are a high-net-worth or salaried individual that can document that you have significant reserves of capital, or you make recurring income from non-rental sources. 

If you are in a good financial position and earn income from other sources (your usual salary, for example) and can show you can meet your commitments and cover any vacant periods, we can often negotiate a higher loan by the lender gaining comfort you can support the mortgage payments during any rental void periods or rate increases. In many cases, this will mean we can secure buy-to-let mortgages of up to 75% loan-to-value.

Here, how you document your additional income and financial position and present this to lenders is critical. Top slicing is not available to every borrower and is only ever offered on a case-by-case basis – especially in the current buy-to-let mortgage market. 

To assess your suitability for top slicing, lenders will look at your current and past financials, and will also assess your future situation as much as possible. This means we will need to be able to document your present financial situation, but also present as watertight a case as possible regarding your plans for the future and how your finances might change over the mortgage term. If you want to top slice on the basis you have significant disposable income that you generate via a salaried role, but you are coming up to retirement age, for example, most lenders won’t consider you unless you can offer comfort in concrete terms. 

This isn’t to say it won’t be a viable option if your financial situation supports top slicing but will mean that we will need to present your case in more detail, usually by providing more supporting documents and financial projections. It’s imperative that we can present your case as strongly as possible at the point when we initially approach lenders for you. 

Top slicing is only ever offered on the basis of hard facts and documented information, so sharing your plans and situation with us as fully as possible will allow us to negotiate for you as much as is possible.

Consider Higher Lender Arrangement Fees For More Competitive Products

If you are looking to refinance, you will naturally want to keep your costs to a minimum. While this will predominantly be linked to your interest rate, you will naturally want to keep administrative costs like lender’s fees to a minimum, too. However, in the current market, it can be advantageous to pay slightly higher lender arrangement fees when you take out your buy-to-let mortgage or refinance, in return for a lower interest rate and the possibility to borrow more. 

Here, cost comparison is imperative. It can be easy to focus on a lower interest rate and overlook what switching or taking out the mortgage will actually cost against the cheaper rate. We can run cost simulations for you against various lending products we have negotiated for you, so you can compare actual savings over the loan term. In many cases, absorbing the cost of a higher lender fee will be advantageous to you over the course of the loan, but it is always worth ensuring this is the case, and having a view on when the ‘break even’ point is. This is especially important with regards to your plans for the property, if you want to sell the property in the short to medium term, for example.