Mortgages plc is hoping to redefine the buy-to-let market with its new Bond-to-Let product.
Created and designed by Fastrack Mortgages, the product includes built-in protection for the investor through a bond amounting to six months’ mortgage payments, which is held in an interest-bearing account with Barclays Bank.
Paul Howard, sales and marketing director at Mortgages plc, said: “What Bond-to-Let provides is protection against rental voids, missed or late payments from the tenant, unforeseen maintenance or repair bills and a time delay to re-negotiate tenancy agreements in the face of rising interest rates.
“The property is a borrower’s investment and we have identified the need for some form of protection for them in this market.”
The loan is available to 80% LTV, requires no proof of income with rates starting at 8.74%.
Owing to the added protection provided through the bond, the lender only requires the rental income to equal 100% of the mortgage payment, compared with other lenders that demand that the rental income is 125%-140% of the mortgage payment.
As a result, Mortgages plc is expecting the product to be particularly popular in London and the South where rapid house price inflation has meant many would-be investors are now priced out of the market.
Howard said: “While property values have shot up in the last year, rents have not shown the same level of growth, which has led to a fall in rental yields in some areas. As a consequence, it is more difficult for would-be buyers to achieve the size of loan they need through traditional channels.
“Bond-to-Let recognises this problem, with its minimal rental cover requirement, which will normally enable the investor to achieve the level of borrowing they require.”
However, Michael Bolton, marketing manager at Future Mortgages, said the scheme’s downside is that the bond is deducted from the advance and so the client needs to raise a bigger deposit.
He said: “At first glance, this is an interesting product, but the six-month mortgage payment which equates to 3.5% of the loan advance makes the real advance 76.5%, not 80%. In the market there are already schemes up to 85% LTV at better rates.”
He added that while the bond does offer protection, sensible investors would put their own provisions in place for this purpose.
“An investor would keep some cash reserves anyway for contingency requirements such as maintenance of property or rental voids,” he said.
Ray Boulger, senior technical manager at John Charcol, said that the headline rate does look uncompetitive when compared with other products in the market.
He said: “Investors will pay a significantly higher rate than otherwise for this facility.”
Lockhart Bruce, company director at Fastrack Mortgages, said that to call the product uncompetitive is based on inappropriate comparisons and does not take into account the housing market in London and the South.