Buy to Let Mortgages
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Buy to Let Mortgages
Ollie explains how the Buy to Let mortgage process works.
What is a Buy to Let mortgage? How does it differ from a regular mortgage?
A Buy to Let mortgage is specifically designed for the intention of renting a property rather than actually living in it yourself. Typically, there are more limitations. For example, the Loan to Value and the amount you can borrow is based upon the rental income rather than your own personal income.
What are the eligibility criteria for obtaining a Buy to Let mortgage? What do lenders consider when assessing a Buy to Let mortgage application?
The main factors that lenders look at for a Buy to Let mortgage include lending up to a maximum of 75% Loan to Value. That means a client would typically need a deposit of 25%. There are some exceptions where you can put down a slightly smaller deposit.
Lenders work off the rental income for affordability, rather than a person’s individual income. In some scenarios, if you go for a longer fixed term deal, they will lend slightly more. That can come into play in areas like London and the south east, where property prices are higher.
Although they don’t work from your income, lenders often want to see that you have your own income of around £25,000, ideally as a minimum. The final bit of criteria is that lenders typically want you to own your own residential property. They get a bit nervous with Buy to Let because the lending is so reliant on the rental income rather than your own income.
How much deposit is usually required for a Buy to Let mortgage?
Typically in the Buy to Let world, you’re looking at a 25% deposit. It could be slightly less depending on the lenders, but the majority are looking for 25. Again, how much is possible is subject to rental income.
Can you explain the concept of rental coverage and how it affects Buy to Let mortgage applications?
This is one of the bigger parts in assessing what you can potentially borrow. Where we’re based, in the south east, property prices are higher. That can cause a bit of an issue as lenders use rental coverage to work out what people can borrow. It’s to ensure that there’s sufficient coverage to cover interest rate increases, maintenance costs, rental void periods or tax.
Are there any specific fees associated with Buy to Let mortgages that borrowers should be aware of?
The main fee to take into consideration is the additional stamp duty surcharge, which now is set at 5% of the property price [podcast recorded in December 2024]. That goes alongside your standard stamp duty.
Other costs that come into play with a Buy to Let mortgage may be slightly higher arrangement fees, and potentially valuation fees. Often those are free on a standard residential mortgage. There may also be additional legal fees, depending on how you’re buying the property.
Should I choose interest only or repayment on a Buy to Let mortgage?
It’s down to the individual. For a first time landlord or a landlord who has a couple of properties, I would probably recommend an interest only mortgage. If, for example, the property is vacant, interest rates go up or there’s large maintenance to do, interest only means you have a smaller mortgage payment to cover.
As you grow a portfolio, perhaps with three or more properties, having one or two of those on a repayment basis may be a better strategy. But with interest only lenders often still allow for overpayments, so you could keep it on interest only, build up some funds or potentially make additional monthly payments, using the overpayment facility to reduce the debt.
What are the implications of recent tax changes on Buy to Let mortgages?
This question does come up a lot but we can’t give tax advice – that has to come from an accountant. When assessing a situation, we look at personal mortgages, where you own the property in your own name, but also the option to buy via a limited company. There can be tax advantages either way – it depends on the individual circumstances.
Typically, we show the client a few different options and then they take that information back to an accountant to decide which option is right for them..
Are there any restrictions on using a Buy to Let mortgage for properties in certain areas or for specific tenants?
You can buy a property across most of the UK, unless it’s very remote – some of the Scottish islands may not be acceptable to lenders. But more often, we find more specific issues such as a property that’s next to a commercial outlet – for example, above a fish and chip shop. If the commercial property is open late or has loud music, or anything that could affect someone wanting to rent that property, the lender may have concerns.
Tenant types can have an effect with certain lenders, as well. Most lenders are going to look for a standard tenancy agreement of a year, targeting professionals or families. If you’re looking to rent out a House of Multiple Occupancy (HMO) that can restrict the lenders we can go to, but there is a market for that. We would run through those scenarios to find out what’s possible for each client.
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Are there any government schemes or support available specifically for Buy to Let investors?
Something you could probably look at is the rent-a-room scheme, although this is not for specific Buy to Let landlords. But if a person is looking to rent out a room in their house, they could earn up to £7,500 per year tax free. If you do have a mortgage, speak to your mortgage lender to find out if that’s allowed on your contract.
As of the time of recording in December 2024, the government is looking very much at green homes and the EPC ratings on properties. There are incentives available around achieving better efficiency ratings.
The final thing in this area is potentially limited company tax relief. Again, it’s worth looking at whether it’s worth buying a property within a limited company, although the costs typically are higher. If you’re a higher rate taxpayer, or if you’re looking to have quite a few properties – or potentially even from an inheritance tax point of view – it could be worth looking at a limited company.
What’s the importance of property management? How does it impact Buy to Let mortgages?
Using a management company to look after your rental property is definitely down to the individual, their experience and also time. If you don’t have the time to manage a property, sometimes it can be very helpful for a letting agent to find the tenants and deal with maintenance issues. But, of course, it comes at a cost.
Someone who is more experienced and has more time may not necessarily need a letting agent. That said, having them find you the right tenant can save you money and time. They could avoid you having to deal with a tenant who isn’t paying rent, for example, or causes damage to the property.
What are the consequences of defaulting on a Buy to Let mortgage?
The consequences of defaulting on your mortgage could include repossession – where the lender comes in and takes the property back. They would probably sell it at a discount, because they just want the money back. That could mean you lose some of the depository you put down originally.
If you default on your mortgage, it’s going to impact your credit profile and potentially future borrowing. If you’re looking to grow your portfolio there will be an impact on what you can do.
Another element is legal action. It may go through court which is not something you really want, as it will cost more money and a lot of time.
Finally of course, in buying that property to rent out, you’re looking at it as an additional income. If you do default on that mortgage and have that property repossessed, you’re going to lose that income. So if you are relying on that, it’s important to keep up the monthly payments.
What are the potential risks with investing in Buy to Let properties?
You could have a break between one tenant leaving and finding a new tenant, where you might have to cover the mortgage payments yourself. This shows again how an interest only mortgage can be helpful rather than a repayment mortgage, as the cost will be lower.
Interest rate rises are another risk. Over the last couple of years, we have seen interest rates rise [podcast recorded in December 2024]. A lot of Buy to Let landlords have been caught out on this and potentially have to find money from their own pockets to cover the mortgage where the rent falls short.
Falling property values are also a risk of investing. Prices don’t always go up. They sometimes come down, although most people like to think that in the long run they will go up in value. A further risk is unexpected costs, such as repairs or maintenance for the property. You might have to find a new boiler or redecorate between tenants. All these things cost money. If you do find the wrong tenant, there could be costs to repair the property.
Finally, changes in taxation can create risk. We’ve seen a lot of these with the new government coming in. Following previous changes in taxation, when buying in a limited company you can currently offset the mortgage for interest purposes, but if you buy in person, you can no longer do that. So buying in a certain entity may be right now, but in the future that could be completely different.
Can you explain the process of adding additional properties to an existing Buy to Let portfolio?
Adding existing properties to a portfolio can be simple. Typically, when you own four or more Buy to Let properties, you’re classed as a portfolio landlord. If you only own one or two properties, buying an extra one can be fairly straightforward. You just need the right size of deposit and affordability.
When you own four or more Buy to Let properties, it does get a bit more tricky. Lenders will start assessing your background properties as well. They look at the overall portfolio value, the overall mortgage amount being borrowed and also the rental figures. There will be a stress test on each separate rental calculation as well, to work out how much can be borrowed.
What steps should a first time Buy to Let investor take before applying for a mortgage?
Typically, the same criteria will apply: the deposit size, rental calculation, etc. However, if you don’t already own a property, lenders look at your income and check this can fit a residential affordability calculation.
This is to check a client is not trying to manipulate Buy to Let finance. They may also look at where you’re buying and where you currently live and work.
How can a mortgage broker help? Have you got anything else you’d like to add?
Getting a Buy to Let mortgage is not simple. There are constant changes in affordability calculations, especially as interest rates have moved over the last few years. Then there’s the property type, location, tenancy type, whether you buy it in your own personal name or in a company… There are a lot of things to consider, so having the right mortgage advisor, but also the right accountant, can help you navigate this market.
We make sure that you’re buying in the right entity. Obviously things can change in the future with taxation, but making sure you’re achieving your objectives from the outset is obviously the key thing.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS
THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE MOST BUY TO LET MORTGAGES.
4 simple steps to secure the best buy to let mortgage
Step 1
Book a time to chat over your objectives and circumstances with a mortgage broker, who is a buy to let investor.
Step 2
Let your personal mortgage broker save you time by working out all the costs, researching the market, and giving you the confidence to invest.
Step 3
When you are happy with the advice and have found the right property to purchase, your mortgage broker will apply online for the best mortgage product for you.
Step 4
Your dedicated relationship manager will see you all the way through to owning your buy to let property and will keep you well informed along the way.
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What you need to know…
A buy to let mortgage is a loan secured against a property which you own and intend to rent out to a tenant. The big difference between a residential mortgage and a buy to let mortgage is that that amount you can borrow is assessed mainly using the rental income from the property being mortgaged rather than your own income.
You may need as little as 15% for the deposit however most lenders require a 25% deposit and products with less than a 25% deposit are less attractive. Your deposit amount is frequently dictated by the rental income of the property.
Property prices are typically higher in the South East and, while rents are higher, it is also common that deposits need to be 30%+ due to lenders’ rental calculations. Most of our advisers have been landlords for many years and have the knowledge to potentially unlock better deals and lower deposits for you.
Chatting with an existing landlord and mortgage expert will be beneficial for you to know how much you will need for the deposit and other associated costs. You may be able to raise a deposit for a buy to let by remortgaging and raising monies from your own home or other buy to let investments.
Unlike a residential mortgage, where the amount you can borrow is based on your salary and your outgoings, a buy to let mortgage is assessed on the rental income that the property is likely to generate. Lenders will typically need the rental income to be at least 125% of the monthly mortgage payments (on an interest only basis) which means that if your mortgage will cost £800 a month, the rent will need to be at least £1,000 a month.
Most lenders will still also require you to be earning an income yourself.