Buy to Let Mortgage
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The Financial Conduct Authority does not regulate some forms of Buy To Let
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Buy to Let Mortgage
Marcus Robinson is back to talk to us about Buy to Let mortgages.
What is a Buy to Let mortgage and how does it differ from a regular mortgage?
A Buy to Let mortgage is for a property that you’ll be renting out to tenants, rather than living there yourself. Often people call them investment properties, because you’re looking to get a return on your investment – the money you’re putting into it.
A big difference is in how the lenders calculate the amount you can borrow. For a normal mortgage, they’ll look at your income and debts to work out the maximum lending. But with Buy to Let, they’re basing it more on the rental income that the property is achieving or could achieve.
That’s decided by the valuer, who goes out and confirms what rent they think that property will get. That informs what they can lend.
Some lenders still do have a minimum income requirement, which is often £25,000, but plenty have no minimum income requirement at all. We’ve got clients who don’t have a job, they’ve just got a Buy to Let and that works fine.
Buy to Let mortgages are usually a bit more expensive, because lenders see them as a riskier proposition to them. But the basic principles are the same – you can get fixed rates or variable rates and our advisors can explain the options to help you decide what to do.
You can also do interest only as standard with Buy to Let. With a residential mortgage, it’s more difficult and more explanation is involved in getting interest only. But with Buy to Let, lenders are happy with it – although you can do repayment if you prefer.
What are the eligibility criteria for obtaining a Buy to Let mortgage? What factors do lenders typically consider when assessing a Buy to Let mortgage application?
They’re very similar to a residential mortgage in terms of eligibility. We look at a lot of the same things, but there are some additional factors. The standard stuff includes things like your credit score and the size of your deposit – because a lot of lenders need you to have a minimum deposit of 25%.
Some lenders allow slightly less than this, but that’s the standard. The bigger deposit you put in, the better the rate on the mortgage.
Lenders also want confidence that you’ll be able to maintain those monthly mortgage payments. You’re going to have the tenants in there to pay the rent, but what if they lose their jobs and can’t pay, or they disappear? They look at whether you can maintain those payments in that situation.
They’ll also look at the tenant potential. Are you able to get a decent tenant in that area? Is it the right place to have a Buy to Let? They also look at your personal experience. You may not have had a Buy to Let before. If that’s the case, are you going to use a letting agent to help you? All these things are factored into the assessment by the lender.
How much deposit is usually required for a Buy to Let mortgage?
It’s typically 25%. That’s what it always was in the past, but then some lenders came up with schemes where they’ll accept 20% and even 15%. The downside for the customer is that the interest rates are usually higher, because it’s deemed to be a higher risk for the lender.
What is rental coverage and how does it affect Buy to Let mortgage applications?
The lender requires the rent to be a certain amount above the mortgage payment. It’s because lenders look at different factors. For example, if something goes wrong with that property, you’re going to have maintenance costs.
Also, if interest rates go up, your monthly payments could go up massively. They need to factor in a bit of a cushion. Generally speaking, they’ll want the rental payments to be at least 125% over the mortgage payment. That’s based on a default interest rate, which is usually higher than what you’re actually paying. It varies between lenders and as advisors we can tell you how much exactly it needs to be, depending on which lender we go to.
Sometimes that rental calculator causes problems and a client cannot borrow as much as they want – but there are ways around that. For example, lenders will offer a more generous calculation if you take a five-year fixed rate, or if you buy the property via a limited company.
The last option is called top slicing. That’s where they will look at your personal income, and if you’ve got disposable income on a monthly basis, they can take that into account as well. They’ll allow you to borrow more than you would have been able to otherwise.
Are there any specific fees associated with Buy to Let mortgages that borrowers should be aware of?
You get fees with most mortgages, and they vary between lenders. Sometimes you get a lower fee but a higher interest rate – and vice versa.
The fees you’re probably looking at are an arrangement fee from the lender, or a booking fee. You can expect to pay a survey fee. And if it’s a remortgage, there are usually going to be legal fees to pay to the lender.
Should I choose interest only or repayments on a Buy to Let mortgage?
It’s down to your personal preferences and goals. Lenders let you choose interest only or repayment, and we find that it’s a mixture with the landlords we speak to. Some want good cash flow and choose interest only because it maximises what they make out of that property on a monthly basis. The downside is they’re not paying off their mortgage at all.
The ones who want to pay it off as early as possible choose repayment. They’re paying it off every single month. We can advise you once we know your circumstances, and what the best option would be for you personally.
What are the implications of recent tax changes on Buy to Let mortgages?
There have been tax changes over the years and landlords feel a bit victimised, as some of these changes hit them quite hard. It’s why a lot of people have moved to buying property in limited companies rather than personal names. Landlords were finding they were actually losing money in some cases.
There are questions about whether this will change with the new government. We honestly don’t know yet [podcast recorded in September 2024].
When you come to us, we can advise you on the mortgage side of things. On tax, we recommend you speak to a qualified tax professional – we’re happy to liaise with them on your behalf, as well.
Are there any restrictions on using a Buy to Let mortgage for properties in certain areas or for specific tenant types?
Not really, because they assess a property on an individual basis. Because it is the security for the loan, lenders just want to know that it’s of sound build quality. They want to know that if they had to repossess, they could resell easily enough.
They also look at whether it’s in the right area to rent out. Is it in a city or the middle of nowhere? You could argue that rural places aren’t going to rent as much as somewhere urban, being far from workplaces. You’re also going to get a better quality of tenant in certain areas.
Lenders also look at the EPC – the energy performance certificate rating. That’s of interest to a tenant because it can affect the bills they pay. Some lenders will even give you a slightly better rate if you’ve got a good EPC rating. So there are benefits to you as a landlord if you can get that property to a really good level.
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Are there any government schemes or support available specifically for Buy to Let investors?
There’s not a lot. It goes back more to what I’ve just said about EPC ratings. They call them green schemes, offering slightly cheaper interest rates if you can hit a certain EPC.
Some lenders now give some additional funding to help you make your property more energy efficient. They may allow you to buy air source heat pumps etc with zero percent interest. That’s not the main mortgage, that’s just some additional borrowing that they can offer you. We can tell you about all those schemes when we meet you.
How important is property management? What’s its impact on Buy to Let mortgages?
We have lots of different landlord clients and some use an agent as a property manager, and some don’t. The ones with more experience may want to do things themselves, but others prefer having support, especially the ones who’ve just come into it or don’t have the time.
Having a letting agent manage your property can save time and potentially even money. But it’s not essential as far as the lender’s concerned – it’s up to you as an individual. Some lenders actually prefer a first-time landlord, because you are renting that property out with someone advising you on what to do.
What are the consequences of defaulting on a Buy to Let mortgage?
Defaulting can unfortunately end up with repossession of your property. They take the keys back, and you would lose the equity in that property you’ve invested in. You’ll want to avoid that at all costs.
What are the risks when investing in Buy to Let properties?
You’ve got tenants in the property, but are they going to look after it? If they don’t, and that property gets wrecked, you’re liable for the cost. Also, if they don’t pay their rent, you have to pay the mortgage. If you don’t, we’re going back, unfortunately, to the repossession side of things.
With any type of property, values can go down as well as up. Historically we know that property values tend to rise, but you never know what’s going to happen. There is always that risk that you buy a property and it does decrease in value.
Can you explain the process of adding additional properties to an existing Buy to Let portfolio?
We’ve got landlords who are happy with one property, but some want to build a big portfolio. We’ve got clients with 50 properties and more that keep growing.
Adding to a portfolio is just another purchase, really. It’s not necessarily any different if you had one or 50, you are just buying another property with a mortgage as an investment.
But if you have got an existing portfolio, you can potentially raise some funds from that. As we’ve touched on, property values can increase, and if you have equity in your property you can pull money out. You can then invest in more property. Having a portfolio will allow you to do that.
What steps should a first time Buy to Let investor take before applying for a mortgage? Have you got any top tips?
Do the homework. Speak to us as early as you can – we do a lot of this type of finance. It’s important to know the area you’re buying in. Has it got the right amenities? Will you get the right tenant? Will the property always be rented out?
There’s a lot you can research on the internet – such as whether there will be new developments in the area, creating new pubs, shops or infrastructure. We can help with lots of this for you and tell you about any exclusive deals that are available to you, as well.
Also, you should consider your exit plan. If you’re buying a property, are you buying it to hold onto in retirement? Or are you looking to buy it, hopefully have an increase in value and then sell on? There are lots of areas to consider.
What else do we need to know about Buy to Let mortgages?
Because we’ve done this a lot, we know the pitfalls. If you come to us, we can guide you through it. We really can save people time and put you in touch with the experts you need. That might be a surveyor, a letting agent or a solicitor.
We work closely with these people on a daily basis. But the key thing is saving you time and making sure that you don’t make mistakes in your journey. We’re happy to speak to anyone and advise them on that.
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Mortgage Style Ltd, trading as Mortgage Style, is an appointed representative of the H LPartnership Limited, which is authorised and regulated by the Financial Conduct Authority.