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Buy to Let Mortgage
Charles Breen answers some frequently asked questions on 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 allows you to buy and rent out property, to make some income or get it to pay for itself. As it’s for an investment property, it differs from a residential mortgage where you’re meant to live in the property yourself and not rent it.
Buy to Let mortgages are specialist products that allow you to buy and rent a house or apartment out.
What are the eligibility criteria for obtaining a Buy to Let mortgage?
It varies massively, depending on the lender. Some lenders will have minimum income criteria, while others won’t.
The biggest hurdle for most people is the deposit. Traditionally it’s a 25% deposit on the value of the property. Some lenders will allow 20% and even 15% but you need to meet credit and affordability criteria.
That’s how it differs massively from a residential mortgage. A lot of the time now, lending is based on the rental income the property can generate. Beyond that it’s very similar – credit searches, proof of ID – the same as with a residential mortgage.
How much deposit is usually required for a Buy to Let mortgage?
Typically it’s a 25% deposit, but some lenders may accept 20% and possibly 15% – but to caveat that, affordability will be tougher because it’s based on your rent, and rates are going to be slightly higher. You’d discuss all of this with your mortgage advisor.
Should I choose interest only or repayment on a Buy to Let mortgage?
It very much depends on your circumstances, your goals for the property and your risk profile. Some people want interest-only, so that they can maximise their monthly income from the property.
Let’s say they’re paying £500 for a mortgage on interest only, and they’re renting it for £800 a month. They make £300 every month to supplement their income. They are taking a bit of a risk there because if the property isn’t paid off by the time the term ends, how will they repay the lender? You need an exit strategy to pay off the outstanding mortgage – because the mortgage doesn’t decrease every month.
Other people will take out a repayment mortgage for the property and every month they’re repaying a bit. They want the mortgage to self-sustain and pay for itself in the end. Perhaps in retirement they then have this nest egg of a property that they can either sell or rent to supplement their pension income.
It’s very dependent on your life stage, your risk profile and financial goals. You would sit down and discuss it with your mortgage advisor. You will go through all the pros and cons of each option and then make an informed decision on what’s best for you.
What are the current interest rates for Buy to Let mortgages?
They’re ever changing. They are getting slightly better here in September 2023 – they are on the right trajectory. But again you would want to speak to your mortgage advisor for an accurate representation of today’s rates.
As we know from last October with Liz Truss’s budget, they can rapidly change in a matter of days, if not hours. So consult your mortgage advisor, is my advice.
Can you explain the concept of rental coverage and how it affects Buy to Let mortgage applications?
Rental coverage is basically a ratio of the rental income divided by monthly costs and other expenses. So if your mortgage payments were £1,000 a month, the lender might require that the property generates at least £1,200 or £1,400 in rent to cover the mortgage and any other expenses.
So the rental coverage is a percentage of the rent. It’s usually 125% or 145%.
Are there any specific fees associated with Buy to Let mortgages that borrowers should be aware of?
On any purchase you will have solicitor fees and you may have broker fees. You’d also have stamp duty which you discuss with your solicitor – they confirm how much stamp duty you’re eligible for. Because you are purchasing a second property there is a 3% surcharge on stamp duty owed to HMRC.
With mortgage products you can get some that have no fees, while others will have a product fee. It varies very much depending on the product. Your mortgage advisor would go through all of this and look at our sourcing solution.
They might find that one lender is at 6.5% and has a £2,000 fee but another lender is at 5.5% with a £4,000 fee – which is going to be best? They’ll go through the figures with you so you can make an informed decision.
What factors do lenders typically consider when assessing a Buy to Let mortgage application?
They’ll look at your income and your credit score and they’ll also look at the rental income. They’ll have calculations in the background, as we briefly discussed, to work out how much rent is needed to cover the mortgage and other costs. The lender then decides how much to lend based on that rental cover.
The deposit is another part we normally look at because that affects how much you can borrow, as well.
Can you provide some advice on finding the right Buy to Let mortgage deals?
The simple answer is to speak to your mortgage advisor.
What are the implications of recent tax changes on Buy to Let mortgages.
With anything to do with tax, we always refer clients to their accountants – they are experts in taxation. It goes a bit beyond our remit. We can guide clients to accountants if needed. We always recommend seeking professional advice on anything to do with tax.
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How do I remortgage a Buy to Let property? When might it be advantageous?
It’s similar to remortgaging your residential mortgage. You would typically do it when your fixed product is coming to an end, to avoid going onto a variable rate.
Landlords often want to remortgage to move to a cheaper rate, because it means they pay less. It’s a business investment so they want to get the best deal. Most people remortgage when their rate runs out – but sometimes it’s because the house has increased in value.
Landlords can remortgage to pull equity out. By taking some of the capital growth out of the property they can either invest it in other properties or do as they wish with it.
Are there any restrictions on using a Buy to Let mortgage for properties in certain areas or for specific tenant types?
A lot of mortgages will be designed around ASTs – that’s Assured Shorthold Tenancies. That is the typical tenancy that a family or an individual would take in a property, usually for a six month minimum term.
Other specialist lenders will only deal with HMOs – Houses in Multiple Occupation. So if you have a mortgage on a property for an AST, you could not then go and rent out individual rooms in the property as an HMO. That would be in breach of your agreement with the lender.
Similarly if you’re doing a mortgage for commercial letting, where you might sign up a company who will guarantee to rent for a year or two years, you’d need to consult with your mortgage advisor. You need to know if that’s possible with the current mortgage. So there are restrictions on the type of tenants that you rent the property to.
So look at your mortgage offer, consult with your mortgage adviser or speak to your lender to understand exactly what you are allowed to do.
What are the potential risks in investing in Buy to Let properties?
As with any investment you are at risk of losing a property or your initial investment. There’s a risk of tenants not paying their rent – you would still have to pay the mortgage.
There’s also the risk that someone damages the property, or that interest rates increase. The big one to be aware of is that this is an investment – you could potentially lose the money you’re investing.
What are the current trends and market outlook for Buy to Let properties in the UK?
As of September 2023, we’re going through a quiet patch because of interest rates rising so high. Buy to Let Landlords are not purchasing any properties at the moment, but hopefully that will turn a corner as rates change.
Buy to Let rents are going up across the country according to statistics and barometers. That is a good thing for Buy to Let landlords because potential earnings are increasing: if rates come down and rent stays at a higher level, then that should maintain Buy to Let as a good investment.
Are there any government schemes or support available specifically for Buy to Let investors?
Not really, because it is an investment. The government doesn’t try to prop up that industry. Because private individuals are investing their own money, there’s no government assistance or schemes.
Can you discuss the importance of property management and its impact on Buy to Let mortgages?
When you have a Buy to Let property, you have two options: managing it yourself or appointing an agent.
If you manage it yourself and a tenant rings at two o’clock in the morning about a leaking pipe, you have to sort it yourself. It might mean calling an emergency plumber or dealing with it personally. It’s the same if they’re locked out and they can’t get into their property etc – you have responsibilities and duties to the tenant.
Or, you can get everything managed by a lettings agent. They would deal with all of that for you, in exchange for a fee, which is usually a percentage of the monthly rent. They take care of maintenance, collect the money, do invoices and inventory checks. They deal with any of the tenants’ issues for you.
Some agents as part of their management would also offer rental guarantees and cover, but speak to the letting agent to understand what they will include for you.
Having a Buy to Let means you have a duty to your tenant. It is very heavily regulated – people need to know that before they become a landlord – you have responsibility for your tenants and there are lots of rules and regulations.
I do advise first time landlords to get someone to manage it because it can be a minefield – and if you get it wrong it can end up being very expensive.
What are the consequences of defaulting on a Buy to Let mortgage?
If you default, the lender will sell the property on your behalf to repay the mortgage. The lender will give you whatever money remains, if any. Defaulting destroys your credit score, as does a home repossession.
Can you explain the process of adding additional properties to an existing Buy to Let portfolio?
This is where you have one Buy to Let and then you buy another, and another and another, until you create a portfolio of multiple Buy to Lets. It is the same process as for your first Buy to Let when you add another one. You can do it with the same lender or a different one. You still need a 25% deposit.
A lot of lenders will have a limit on how many properties you can have with them. With some that limit is 10 before you become too large and they want you to move the portfolio to another lender.
Some lenders will only want a certain number of properties, but don’t mind if you have mortgages with other lenders. One specific lender which will allow you to group all of your mortgages under one umbrella mortgage. You get a single rate, one payment and one end date for all your properties. It means you don’t have to remortgage each property individually at the end of the term. You would just have one large umbrella mortgage to deal with your portfolio.
What steps should a first time Buy to Let investor take before applying for a mortgage?
Always speak to a mortgage adviser. We’ll lay out the steps to take, the pros and cons and the pitfalls. What would your liabilities be? What’s the right strategy for you? How much could you borrow? How much do you need and where will you get your deposit?
Always speak to a professional before you embark on this – it’s not as easy as people think. There is more work being a landlord than you might realise, so get advice before you start.
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.
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