Buy to Let Mortgages
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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 purchasing property to rent out. It differs from a regular mortgage, as it’s based on expected rental income rather than just personal income.
The majority of these mortgages aren’t regulated by the Financial Conduct Authority, so you don’t have the same protection under the Financial Services Compensation Scheme as with a traditional residential mortgage.
What are the eligibility criteria for obtaining a Buy to Let mortgage?
Typically, you need to be over 18 to get a mortgage in the UK. Then lenders typically consider the borrower’s income, credit history, existing debts and the expected rental income from the property. The age and type of property can also be important factors.
How much deposit is usually required for a Buy to Let mortgage?
Usually a deposit of at least 25% of the property value is required. However, if you want a slightly better mortgage rate you would be required to put in a bigger deposit.
Also, if the rental is not quite enough to get you the borrowing amount you need, you might have to put in a slightly larger deposit.
What is ‘rental coverage’ and how does it affect Buy to Let mortgage applications?
Rental coverage refers to the ratio of rental income to mortgage payments. Lenders often require the rental income to be 125% to 145% of the mortgage payment to ensure affordability.
If the mortgage payment was £100 a month and you’re applying to a lender with 125% rental requirement, the monthly rental would need to be at least £125 a month.
Are there any specific fees associated with Buy to Let mortgages that borrowers should be aware of?
Yes, these can include arrangement fees, valuation fees and legal fees which are generally higher than for residential mortgages. There may also be a fee if you’re using a mortgage broker.
Should I choose interest only or repayment on a Buy to Let mortgage?
Interest only mortgages are common in Buy to Let because they keep the monthly payments lower but, of course, repayment mortgages reduce the loan over time.
The choice depends on your investment strategy. If you’re looking to purchase more Buy to Lets in the future, an interest only option could let you build up more capital for your next investment.
What are the implications of recent tax changes on Buy to Let mortgages?
We don’t provide tax advice, and we always recommend clients seek tax advice from an expert as part of the decision to invest in a Buy to Let property.
But in general terms, the changes reduced mortgage interest rate tax relief, and introduced an additional stamp duty surcharge for second properties. This obviously impacts profitability for Buy to Let landlords.
Whether you buy the property in a personal name or a limited company – and whether you’re a higher rate or a lower rate taxpayer – also impacts tax liability and profitability when owning a Buy to Let property.
Are there any restrictions on using a Buy to Let mortgage for properties in certain areas or for specific tenant types?
Yes, some lenders have restrictions on properties in certain locations. On some new build developments, for example, they will have ‘maximum exposure levels’ where they won’t take more than a certain percentage of the units in that development.
In terms of specific tenant types, you’re not allowed to discriminate in terms of tenants you take. But one stipulation from virtually all the Buy to Let lenders is that you can’t let to an immediate family member. To do that, you’d have to apply for a regulated Buy to Let mortgage, which has different terms and conditions.
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We support clients through a daunting process, looking at your circumstances and taking time to understand your priorities. We then research the market for the most appropriate options based on those needs.
Are there any government schemes or support available specifically for Buy to Let investors?
No, there aren’t currently any specific government schemes targeted at Buy to Let investors.
How important is property management with Buy to Let mortgages?
Effective property management is crucial for maintaining the property condition and tenant satisfaction, which can affect the rental income and mortgage repayment.
I’ve worked in estate agents in Canary Wharf and one in Slough, and obviously I’ve worked with agents all the time since, and I know that landlords who look after their properties find the right kind of tenants.
Landlords that don’t look after their properties often find that because fewer people are willing to live there, they don’t always find the best tenants.
So I’d strongly recommend that landlords do take their responsibilities seriously – and obviously there are legal implications if they don’t.
What are the potential risks involved in investing in Buy to Let properties?
When you’re thinking about it as an investment, it’s very simple. You can’t be thinking of it like your own residential home, where decisions are made with the heart.
A Buy to Let investment is like other opportunities, such as investing in the stock market, or starting your own business, etc. It’s risk and return.
What are the consequences of defaulting on a Buy to Let mortgage?
The main consequence is potential repossession of the property, plus damage to your credit rating and financial losses.
How do I add additional properties to an existing Buy to Let portfolio?
All lenders have different criteria on the maximum number of properties that they will allow. There’s a definition for a portfolio landlord to take into consideration as well.
In general terms, we’ll be reassessing your financial position and ensuring compliance with the lender criteria for multiple properties. Then, there might be potential refinancing of existing properties involved.
What steps should a first time Buy to Let investor take before applying for a mortgage?
The important thing is to research the market. Unfortunately, a lot of first-time landlords get excited because of things that they’ve seen on social media – but the reality is that there’s no shortcut.
It is very important to do your research. I would strongly recommend speaking to a broker to understand how the finance works and the price point you can look at, depending on the rental.
Ensure you’ve got the appropriate credit score and deposit amount, and obviously take time to understand the legal responsibilities of being a landlord. Do you have the time and resources to manage everything once you complete on the mortgage?
Lenders tend to assess first-time landlords on personal income rather than rental, because unfortunately, there have been some bad eggs in the past who took out Buy to Let mortgages and then decided to live in the property. So that’s just something to be aware of.
How can a mortgage broker help here if somebody is looking into a Buy to Let mortgage?
Mortgage brokers can provide access to a wide range of products – much more than your local bank branch who are restricted to their own products.
We also offer expert advice – we can talk about lots of different options around term and interest rates or how to build a portfolio. We will assist with the application process and handle it from start to finish. Our job is to find you the best terms and the best rates for you as the client.
The most important thing to remember is that most mortgage brokers don’t charge for an initial conversation, so you’ve got nothing to lose.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
SOME BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.
