Buy to Let Mortage

A Buy to Let mortgage is a loan secured by a property that has been purchased only for the purpose of renting it out to renters and is not being used as a primary residence.

The Buy to Let property market has grown dramatically in recent years, and where it was once primarily the domain of professional landlords, it is now populated by people from all walks of life and professions.

Finding a lender who offers a program and meets your criteria can be difficult and time-consuming, and there are several downsides as well as benefits to having a Buy to Let mortgage.

Buy to Let mortgages

Years ago, getting a Buy to Let mortgage was much more difficult than it is today, because they are now focused on investment homes rather than personal dwellings. A buyer would typically need to negotiate with a professional lender and may even have to pay cash for the property–this made it extremely difficult for new purchasers to enter the market, since most requirements were quite precise and aimed toward experienced landlords.

However, as the market matured, Buy to Let homes grew more widespread, and Buy to Let mortgages are now almost standard fare from main street banks and building societies. It’s now easier than ever to secure a Buy to Let mortgage with the help of a knowledgeable mortgage broker.

Purchasing a rental property is currently a very appealing option that might pay out handsomely in the long run. As a result, whether you’re a first-time landlord, have a portfolio of properties, or want to rent out a Home in Multiple Occupation (HMO), lenders are likely to have a mortgage package to meet your needs. Finding the perfect mortgage, on the other hand, may be difficult, and getting the right guidance can be just as crucial as finding the greatest house.

Our professional mortgage brokers at The Mortgage Centres will be able to walk you through the entire process and provide you with the best advice for your specific situation. We’ve helped everyone from seasoned landlords to first-time purchasers find the finest mortgage lender for their needs–get in contact with us today to find out which one is right for you.

How to get a buy-to-let mortgage?

A buy to let mortgage can be obtained in a variety of methods, but understanding how the buy to let mortgage market works can help you get the best deal. You may believe that going to your current bank or building society is the simplest method to discover a buy to let mortgage package. However, remember your bank or building society can only offer you their mortgage products and these may not be the best buy to let mortgage deals for you. You may also discover that their specific lending requirements based on your personal circumstances or the property you intend to buy prevents them from lending to you for this purpose.

True, Buy to Let mortgages are often only available to those who already own a home, but a rising number of people are becoming Buy to Let landlords while living with friends or family, or renting a home, in order to get their foot on the property ladder and have a future investment.

Many lenders prefer to deal with people who own a property rather than ‘own/occupy,’ and while getting a Buy to Let mortgage as a first-time buyer may be more challenging, it is not impossible. The lender will almost certainly check to see if you can afford the mortgage on a residential basis. Whatever your situation, you’ll need to supply details about your present property portfolio, as well as proof of income and rental income.

While many people obtain Buy to Let mortgages on a personal basis, it is also possible to obtain a mortgage in the name of a limited business that has been formed specifically for the purpose of owning and renting out properties. In many cases, keeping your business and personal finances separate makes sense, but whether you want or need to utilise a ‘Limited Company Buy to Let’ mortgage depends on your unique tax situation and investment ambitions. A suitably qualified accountant or tax professional will be able to provide you with sound advise on what will work best for you.

This is a common question we get from both new and experienced landlords. There are a few options to think about:

Convert your home into an HMO (home in multiple occupation)

Renting out your home on a room-by-room basis rather than as a whole unit might boost your lettings income dramatically. You will, however, need to secure the necessary approvals from your local government, as well as be willing to manage the demands of multiple renters within the home.

Select rental properties with high rental returns.

It may appear to be a smart idea to buy a property for £300,000 and rent it out for £1,200 per month, but there are other options to consider. Buying two houses worth £150,000 each and renting them out for £750 can give you a much better return on your investment in the long run, as well as dividing your risk of rent default.

Get the best mortgage advice possible.

Professional guidance might be just as valuable to you as raising revenues through other means. A specialist broker can assist you in finding the best offers and is useful when it comes to the fine print. When you factor in the lender’s fees and other charges, the mortgage with the lowest rate may not be the cheapest in the long run. Choosing the appropriate mortgage can result in hundreds of pounds in savings over the life of the loan.

Select an interest-only loan.

This is a fairly straightforward technique to boost your monthly revenues. Paying solely the interest on your mortgage each month, rather than a repayment amount, lowers your outgoings and increases your return. On the other hand, you must ensure that you have a long-term plan for paying off your mortgage. Both types of mortgages have advantages and disadvantages, and an expert advisor can help you decide which is best for you.

Much depends on how risk-averse you are as a landlord, just as it does with a personal mortgage. A fixed interest rate, of course, means you know exactly how much you’ll pay each month, although it’s usually a little more than a tracker rate. If interest rates fall, you’ll lose money, but if the Bank of England raises its base rates, you’ll be safe.

A tracker mortgage may have a lower interest rate than a fixed rate mortgage, but it also comes with the risk that monthly payments will climb in lockstep with any increases in the Bank of England base rate. The appeal is obvious: if the Bank of England rate falls, the rate will drop as well–your decision may hinge on where you perceive the interest rate trend at the time you apply for the mortgage.

Much depends on how risk-averse you are as a landlord, just as it does with a personal mortgage. A fixed interest rate, of course, means you know exactly how much you’ll pay each month, although it’s usually a little more than a tracker rate. If interest rates fall, you’ll lose money, but if the Bank of England raises its base rates, you’ll be safe.

A tracker mortgage may have a lower interest rate than a fixed-rate mortgage, but it also comes with the risk that monthly payments will climb in lockstep with any increases in the Bank of England base rate. The appeal is obvious: if the Bank of England rate falls, the rate will drop as well–your decision may hinge on where you perceive the interest rate trend at the time you apply for the mortgage.

Buy to Let Fixed Rates

This sort of mortgage lets you to keep your interest rate fixed for a set amount of time–usually two, three, or five years. This implies that your monthly payments will be consistent over this period, and you will be safeguarded from any economic fluctuations, such as an unexpected increase in the Bank of England base rate. In the event that the Bank of England rate falls, you will lose any savings.

Tracker Rates for Buy-to-Let Properties

This form of a mortgage usually has a higher interest rate (or fraction of a percentage point) than other rate indexes, which are set and then ‘tracked’ for a specific length of time–commonly two, three, or five years. Depending on the lender, the most typical rate to track is the Bank of England base rate, while certain specialized lenders may choose to track the ‘LIBOR’ rate (London Inter-Bank Offered Rate).

If the index to which your mortgage is tied rises, your interest payments will climb as well. Similarly, if it drops, then your interest payments will decrease by the same percentage. In the long run, taking this risk could either save you money or cost you more.

You do, however, save money right away because the rates offered by the lender for a tracker rate are typically lower than those offered for a fixed-rate mortgage. So, if interest rates stay the same during the period of the mortgage, you will save money compared to a fixed-rate mortgage.

The requirements for obtaining a Buy to Let mortgage may likely differ from one lender to the next, but there are a few basic requirements that you must achieve.

To begin, Buy to Let mortgages are meant for persons who want to buy or refinance a residential property for the purpose of investment, and who will normally own their own house (either outright, or also mortgaged). It’s not impossible to secure a Buy to Let mortgage if you’re a first-time buyer, but it’ll be more challenging, and the lender will want you to be able to afford the loan on a residential basis.

Second, while you’re more likely to apply for a Buy to Let mortgage as an individual, there are mortgage options available to Limited Companies that were formed specifically to manage a home lettings business. Some landlords will benefit from these items more than others, and you should consult a certified accountant or tax professional to see if they are right for you.

Following that, there are a few crucial elements that lenders will always take into account:

Anticipated Rental Salary — When applying for a residential mortgage, lenders would often apply affordability criteria based on your income, but when applying for a Buy to Let mortgage, lenders will define affordability based on the projected rental income. Lenders will often calculate the amount of borrowing they will allow based on a specific rent, taking into account the borrower’s income tax status and the length of the fixed mortgage rate. Individual lenders’ methods will determine how the calculation is done, but a rough estimate of rental revenue would be 125 percent of the mortgage interest, assuming a 5% notional rate. This would provide a level of protection for all parties involved in the event of unanticipated interest rate increases.

Income and Tax Status — Unlike residential mortgages, commercial mortgages do not necessarily require proof of independent earned income. Many lenders may evaluate your application even if the rent from the property is your only source of income, while others will want you to show that you have a source of income other than the rent – possibly £25,000 or more.

The Deposit or Equity — The amount of deposit or equity will fluctuate depending on market or industry trends, but lenders will typically seek a down payment of 20-25 percent of the property’s value. They may be willing to extend a mortgage with an LTV (loan-to-value) ratio of 75-85 percent if the anticipated rental revenue is estimated to be sufficient.

Other Rental Properties — If this isn’t your first rental property and you own others, you’ll be referred to as a ‘portfolio landlord.’ Lenders will take this into account while reviewing your application and may perceive the overall lending risk as favourable. Talking things through with one of our experienced mortgage advisors is the best way to gain a realistic picture of how a lender would assess your application. They’ll be able to figure out what kind of mortgage you’ll qualify for and walk you through the entire procedure from beginning to end.

A Buy to Let mortgage will be available for most types of property, but there will always be a handful that require a more specialised approach or are simply inappropriate for this form of financing. Here are a few examples of when things may differ from a standard Buy to Let mortgage:

Property that is leased

These are normally appropriate for a Buy to Let mortgage, however the terms of the lease will determine this. Lenders often require at least 70 years left on the lease, as any duration less than this may effect the term of the mortgage and, in many cases, the property’s value. With the owner or present landlord, you might be able to negotiate a new or extended lease.

Houseboats and mobile residences

Houseboats and mobile homes, like residential mortgages, are often excluded as mortgageable properties since they are not deemed adequate security for the loan.

Flats/apartments

Certain types of apartments and flats, which may be seen as a larger risk than others, will almost always require a Buy to Let mortgage from a specialised niche lender. This can include things like:

  • Studio apartments with limited living space.
  • Flats on larger blocks and/or having deck access that were formerly owned by the local authority.
  • Flats atop specific sorts of property, such as quick food restaurants.

If you own additional properties in the same block, street, or postcode, the lender may take them into account as well in order to reduce their risk.

Lenders will, as usual, take slightly different approaches to different types of property based on their own internal criteria. To avoid disappointment and multiple unsuccessful lender applications (which can harm your credit score), talk over your circumstances and goals with an experienced mortgage broker–contact one of our team members today, and they will be able to walk you through the process and identify which lender is best for you.

 

Yes, this is entirely possible–there is no difference between a mortgage for a freehold or leasehold property as long as there is a legitimate lease in place. Keep in mind that leasehold properties come with additional costs such as ground rent and annual service or maintenance fees for the care of communal areas and utilities, as well as property owner services.

The only thing that will cause you to default on your mortgage payments is if your leasehold period is too short. If the leasehold period is less than 70 years, it will have a negative impact on the property value and, as a result, the value and duration of the mortgage. The current property owner and/or landlord, on the other hand, may be open to negotiating a new or extended lease.

Lenders will include in any regular charges for services and amenities when calculating your affordability and determining how much money you may borrow based on your prospective rental income. It’s critical that you understand exactly what these fees and costs will be, and whether future increases will have an influence on your investment’s net income.

The mortgage application will also take into account the real owner of the building’s freehold. Home investors may have had an interest in the Freehold and were taking out a Leasehold on a property inside it in the past, but many lenders will no longer offer a mortgage if this is the case currently.

When comparing typical residential mortgages to Buy to Let mortgages on a loan-to-value basis, you can expect Buy to Let to be more expensive. When it comes to costs, you’ll have to deal with the following:

  • Fees for setup and valuation
  • Fees for arrangement or completion
  • Rates of interest

Completion costs vary considerably from one lender to the next, and in certain situations, they can be as high as 3% of the loan value, reflecting the commercial aspect of the property.

Lenders establish interest rates based on the business offer, the current market, and their higher level of perceived risk at the time. Although the difference may not be significant, the rate will be slightly higher than you would expect for a residential mortgage.

For a variety of reasons, most borrowers choose an interest-only mortgage for their Buy to Let property. This decision is mostly driven by tax efficiency, but there are additional budgetary considerations, such as ensuring that there is a healthy surplus each month to accommodate for unexpected needs such as repairs or periods when the property may be vacant with no revenue while costs are ongoing.

An interest-only mortgage has a fixed loan amount that does not change over time. This also means that you will pay higher interest overall throughout the term of the loan. This may be appropriate for borrowers with a certain tax situation, but it may not be appropriate for everyone. To ensure that your mortgage arrangements are appropriate for your unique circumstances and goals, consult a trained expert.

This is one of the most often asked questions we get from people interested in buying a Buy to Let property. Unfortunately, it’s impossible to give a simple answer because the amount of deposit each lender requires changes depending on the loan’s other terms.

It is possible to obtain a Buy to Let mortgage with a 15% deposit, but the requirements will be extremely strict, making it impossible for many to qualify. In most cases, a deposit of 25% might be more appropriate, and in other cases, it might need to be even higher.

The expected rental value is the most critical decision element for lenders when determining how much you can borrow; in many situations, this will outweigh their standard minimum deposit requirements, which is not in your favour. For example, if you were to buy a house for £300,000, a 25% deposit would be £75,000. However, if the prospective rental revenue from the property meant they were only ready to lend £210,000, the minimum deposit requirement would take precedence, and you would need to put down a 30% deposit to proceed with the mortgage.

 

Fortunately, some lenders are now ready to consider personal income from other sources or a salary when determining the affordability of a mortgage, seeing this as a way to make up for the loss in rental income. ‘Top-slicing’ is a term used to describe this process.

Despite the risks of a market collapse, tenant defaults, or increasing property costs, Buy to Let properties offer a huge possibility for profit–both from rental income and capital gain through the rising value of the property over time. Most Buy to Let landlords believe that the rewards outweigh the dangers, but before you buy a house as an investment, you should be aware of all the costs associated with property ownership.

Income Tax

The most important cost to consider is your tax liability. Because you are getting income in the form of rent from the letting of the property, you must disclose it and it will be subject to tax. However, as chancellors and budgets change, the manner by which this tax is computed changes as well. This has resulted in a growth in demand for ‘Limited Company Buy to Let’ mortgages as more landlords have structured their businesses to be more tax-efficient. If you’re not sure what to do, you should see a skilled tax advisor.

Capital Gains tax

Because you could have to pay tax on the profits if you sell the property later, it’s a good idea to think about how capital gains tax will influence your income and cash flow right now. Again, tax is a complicated issue with frequently changing rules, so speaking with an expert accountant or tax adviser is recommended.

Maintenance

As the owner of a property that is rented out to tenants, you will have a legal responsibility to ensure that it is safe, legally habitable, and maintained to a specific quality for the people who live there. This clearly comes with a cost, so make sure to leave room in your budget for any unexpected expenses or routine maintenance. As we all know, some difficulties, such as broken boilers or roofs, can arise out of nowhere, and HMOs (housing of multiple occupation) can draw additional laws and fees, so doing your homework on the legislation in your area before starting a landlord business will pay off.

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