|By TurnKey Landlords||
|March 10, 2013 12:55 PM EDT||
by Ben Gosling.
The average loan to value ratio of buy to let mortgages taken out in the last quarter of 2012 was just under 75%, meaning your typical landlord was putting down in deposit a little over a quarter of the value of a new property.
We generally accept that 75% is the higher threshold to qualify for the best rates. Any higher, and you’re liable to pay a loaded rate to reflect the increased risk a lender is taking in forwarding such a high proportion of the cost.
At present, 15% is the minimum amount you can put down as a deposit, meaning that you can’t borrow more than 85% of the value the value of the property. There is a gap, then, between the maximum LTV for best rates, and the highest LTV available. Straddling this large(ish) wilderness are 80% buy to let mortgages.
Though you’d be forgiven for thinking that 80% buy to let mortgages would likely be ignored in favour of smaller loans or cheaper rates, many of our customers still enquire about them. What’s the appeal?
Well, I have my own theory…
80% buy to let mortgages and the ‘Goldilocks principle’
We all remember the children’s story about a young girl breaking and entering into a cottage owned by three bears with an atypical love of soft furnishings and porridge. What we might not remember is how the ‘Goldilocks principle’ has guided many of the decisions we’ve made since then.
When applied to marketing, the principle states that, if given the choice of three products, people will tend to ignore the extremes and go for the mid-range one. The most expensive product serves to make the middle one seem good value, whilst the cheapest product appears low quality by comparison. (I catch the principle at work when I go straight for the £5–6 bottles of wine in my local Tesco.)
Let’s say someone had enough cash tucked away for a 25% deposit, giving them the choice between a 75%, 80% and 85% LTV mortgage for a buy to let property. According to the Goldilocks principle, 85% will look too cheap – though the deposit is lower the rates are higher, you pay more interest and may lose out in the long run. Conversely, 75% rinses your savings and leaves you with nothing for refurbishment or running costs once the property is yours. 80% sits comfortably between the two and offers an attractive alternative.
Now, a buy to let mortgage is a much greater commitment than a £5.49 bottle of
What are the pros of 80% buy to let mortgages?
80% buy to let mortgages afford borrowers a decent ‘safety buffer’. Prices fell by around 15% in the last recession, so having 20% equity in your property means you’ll still be in the black if the same thing happens again. (This is especially important if you’re taking the interest-only route.)
Keeping some funds aside
Let’s say you had £25,000 to put towards a £100,000 property. Going for an 80% buy to let mortgage would allow you to keep £5,000 of that aside. This could be used for repairs, or to increase the value of your property – £5,000 worth of improvements, if done right, could amount to more than £5,000 extra value, leaving you in a better position equity-wise than if you’d gone for the 75% mortgage.
Imagine a different scenario – you have 40% equity in an existing property and want to expand. If you aim to build a portfolio as quickly as possible, low LTV mortgages are often the way to go; remortgaging at 80% would release enough cash to put another 20% deposit down on a similarly priced rental property.
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