HSBC presents landlords mortgages with only a 20% deposit… however will they go the affordability checks?
- Number of 80% buy-to-let mortgages has more than doubled in past two years
Buy-to-let investors are being offered an increasing number of mortgage deals requiring just a 20 per cent deposit – provided they can pass the affordability checks.
Last week, HSBC made changes to its buy-to-let product range, increasing the maximum loan to value (LTV) to 80 per cent – meaning they can put down a deposit of just 20 per cent.
The offer is only available on loans of up to £400,000, and on properties with an energy performance certificate (EPC) of between A and C,
HSBC’s 80 per cent LTV mortgage charges a 5 per cent interest rate on a five year fix, with a £1,999 fee.
The number of buy-to-let mortgages covering 80 per cent of a property’s value has been on the rise for some time, according to Moneyfacts.
In the past month alone, it says the total number of deals across the market has risen from 417 to 426.
More options: Moneyfacts says the choice 80% loan-to-value mortgages for buy-to-let investors is at a record high, with 426 deals now available
That is significantly up on a year ago when there were only 334 of these products for landlords and in March 2023, when there were just 200 available.
Most landlords typically opt for buy-to-let mortgage deals covering 75 per cent of a property’s value.
There are 1,773 such products on the market at present, according to Moneyfacts.
But lenders such as HSBC seem to be becoming increasingly prepared to allow borrowers to purchase rental properties with smaller deposits.
Oli O’Donoghue, head of mortgages at HSBC said: ‘There is still strong demand in the buy to let market.
‘By increasing the maximum LTV on our range up to 80 per cent LTV we are making purchasing a buy to let property more accessible to people and providing greater flexibility, enabling a reduced deposit and increasing the borrowing power of the applicant.’
Will 20% deposit buy-to-let mortgages be popular?
Chris Sykes, technical manager at broker Private Finance says that 80 per cent buy-to-let mortgages have gradually been coming back since interest rates skyrocketed in 2022.
However, even with increasing numbers of products, he believes most landlords will stick to deals requiring a 25 per cent deposit (75 per cent LTV)or more.
This in part down to mortgage rates being higher for 80 per cent deals.
The average five-year fixed rate for buy-to-let deal at 75 per cent LTV is 5.46 per cent, compared to 5.89 per cent at 80 per cent.
On a £200,000 interest-only mortgage – a common option for landlords – that’s the difference between paying £910 and £981 a month.
Sykes also thinks that many investors won’t be able to get an 80 per cent mortgage even if they want to, as their properties won’t have a high enough rental yield.
The rental yield is the percentage return a landlord can expect to make back on the purchase price each year.
For example, a 5 per cent gross yield on a £200,000 property would amount to £10,000 per year in rental income.
Whether a landlord is approved for a buy-to-let mortgage is largely dictated by how much rent the property can generate.
Affordability for a buy-to-let mortgage is usually assessed by looking at something called the interest coverage ratio (ICR). This is the ratio of gross rental income to mortgage interest payments.
Mortgage lenders want to see that the rental income will cover the mortgage payment, plus a margin to cover other costs.
While this can vary from lender to lender, the average lower-rate taxpayer will need the rental income to cover the mortgage payment by 125 per cent – while higher-rate taxpayers typically see this rise to 145 per cent.
To mitigate risk, lenders also stress test their customers to ensure their investment would remain profitable if mortgage rates went up.
Typically, they add an additional 1 to 2 per cent to the mortgage rate.
‘I can’t actually remember the last time I successfully did a 80 per cent buy-to-let mortgage,’ says Sykes.
‘Very few investors will be taking them. I’d say on average my landlord clients operate at more like 60-65 per cent loan-to-value.
‘Usually the premium on the rate when moving from a 75 per cent to a 80 per cent mortgage is quite large, but the main issue getting an 80 per cent mortgage on a buy-to-let is achieving a high enough rental yield to justify the level of borrowing.’
Smaller deposit: HSBC has increased the maximum LTV on its buy-to-let mortgages to 80% with the new range including rates at 5% interest
According to Zoopla data, the average rental yield in 2024 was 5.6 per cent – but Sykes says the affordability calculations for an 80 per cent LTV mortgage will often require closer to 6.5 per cent.
‘Even then, the margins for profit are very, very thin at that level and it won’t leave much room for a broken boiler or property improvements or maintenance,’ Sykes adds.
‘I don’t see this encouraging more buy-to-let investors into buying property. Ultimately, the margins on 75 per cent mortgages are better – and sometimes we are even struggling to secure 75 per cent on a mortgage, let alone get to 80 per cent.’
