Buy to Let Mortgage Advice

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Buy to Let Mortgage Advice

Buy to Let Mortgage

Rohit Kohli talks us through Buy to Let mortgages – how they work and what lenders look for.

What is a Buy to Let mortgage and how does it differ from a regular mortgage?

A Buy to Let mortgage is one you take out on a property that you intend to rent out, usually on an assured shorthold tenancy or perhaps as a House in Multiple Occupation (HMO).

Because you’re not living in the property as with a regular mortgage, you need a Buy to Let mortgage for a property that you intend to rent out to people.

What are the eligibility criteria for a Buy to Let mortgage?

It is very similar to a regular mortgage but there are some slight nuances and differences between the two. For example, you will need a bigger deposit – typically, you’ll need 25% for a Buy to Let mortgage.

Although lenders will assess your personal income as part of the process, they factor in the rental income that you’re going to get from the property. They want to understand whether the rent from that property is going to cover the mortgage payment itself.

They’ll also consider the property itself and whether it’s suitable for renting out. Lenders will not allow you to rent out a very small room in a block somewhere, but they’ll be more than happy with a standard apartment or house.

How much deposit is usually required for a Buy to Let mortgage?

You’re going to need at least 25% deposit for a Buy to Let. It could vary based on the actual rental income – because you may not get enough rent to cover that. In that situation a lender may say that they can’t offer a 75% mortgage, but they can do 70%.

In that situation, you’ll need a bigger deposit to cover the shortfall between the rent and your mortgage payment.

Should I choose an interest only or repayment Buy to Let mortgage?

It depends on your circumstances. Many of our Buy to Let investors or landlords choose an interest only mortgage initially. Because you’re only paying the interest back, and not the capital, you make more profit each month. You can use that profit either as additional income or to build a deposit towards a further purchase.

A repayment mortgage will allow you to pay that mortgage off, but your monthly payment is going to be much higher. You will pay off the mortgage, though, whereas with an interest only mortgage you will need a plan to pay that back at the end of the mortgage term.

What is rental coverage and how does it affect Buy to Let mortgage applications?

When they’re assessing the mortgage, the lender will look at how much rent you will be getting from the property, against how much the mortgage payment is going to be.

They are looking for rental coverage, plus a buffer. They need to make sure there’s enough room between the rent and the mortgage payment to allow for possible interest rate rises. The last thing they want to do is put you into a position where the rent can’t cover the mortgage.

So it’s really important to understand what the rental market looks like for the area that you’re looking at. The rent will have a big impact on your ability to secure the right borrowing.

Are there specific fees associated with Buy to Let mortgages?

Buy to Let is seen much more like a business than a residential purchase. Because of that, there are higher fees attached to a lot of the mortgages. Sometimes you get free valuations, but often you won’t, so there’ll be a valuation fee to pay.

There will also be fees for the mortgage product itself which can sometimes be higher than residential mortgages. You should also consider your letting fees if you employ a management agent, and how much that is going to cost you. That would affect your affordability.

Then there are the legal fees, which are sometimes higher than for a standard residential purchase, as well. You need to know your numbers – and that’s one of the things that a mortgage broker can help you assess.

What are the implications of recent tax changes on Buy to Let mortgages?

I’m not a tax advisor, so people should get specific tax advice on their circumstances. The advice would be different for each individual person.

But generally speaking, there are two areas of tax that people need to think about. One is stamp duty. If you are purchasing a Buy to Let property and you already own another residential property, you have to pay the second property surcharge on stamp duty.

Secondly, changes have been made on how you claim back interest as a cost on a Buy to Let. If you own a Buy to Let on an individual basis, it can be more expensive depending on your tax bracket. Some people choose to buy property through a limited company, which is another option. It allows you to pay tax on the income in a different way, but can be a bit more expensive to run. It can also cost more to secure a mortgage this way.

It may not be right for everybody, so you need to assess what works for you. After getting your tax advice, if you do go down the limited company route, you need to consider that sometimes the cost for limited company mortgages can be a little bit more.

Speak To an Expert
We’ll help you compare mortgage offers from different lenders and find the one that’s right for you. We can also answer any questions you have about the mortgage process and help you understand the paperwork.

How do I remortgage a Buy to Let property and when is it advantageous?

Just like if you had a mortgage on your own home and your current deal was coming to an end, you would look to remortgage to the next deal you can get. In Buy to Let there are a couple of things you can do.

Over the long term, property prices do increase, and people look to remortgage to release some of the equity out of their Buy to Let. They can use that money to refurbish the property if it’s time for a spruce up. Or they can use it as a deposit towards their next purchase.

Remortgaging a Buy to Let is usually done to get a better rate on your mortgage compared to the standard variable rate for your lender, or to release some equity.

Are there any restrictions on Buy to Let mortgages for properties in certain areas or for specific tenant types?

We talked earlier about a house in multiple occupation (HMO). A lot of these properties require licences and planning permission to set them up in the right way. You would need to contact your local authority to see if a property you’re considering could have that type of rental agreement attached to it.

There may be certain areas where they’re not happy to have any more HMOs going live – so may not want to purchase that property if that was your plan. Some lenders will ask about the type of tenants that you’re looking to put into the property. A lot of lenders don’t like subletting – they would want you to rent the property out directly to a tenant. Some lenders will consider it, however.

Generally if you’re thinking of doing anything outside of the norm, it’s worth speaking to a mortgage broker first to understand the possibilities.

What are the potential risks involved in investing in Buy to Let properties?

There are risks involved in Buy to Let. If you’re choosing an interest-only mortgage, remember that at some point you’re going to have to pay back that mortgage, when it ends after 25 or 30 years. If property prices have fallen, you still have to pay back that original mortgage amount. You would need to make up that difference on selling the property.

We always have a conversation with our clients about this explicitly. You need to have an exit strategy in place for your Buy to Let properties and think about what might happen if that plan doesn’t come off.

There will also be costs involved in renting out your property. Most tenants are brilliant and look after the property as if it’s their own home. But sometimes things happen. You will have to make repairs, or the boiler might break down – so you need some contingency funds. You also need to have the right insurances in place, as well.

Are there any government schemes or support available specifically for Buy to Let investors?

There aren’t many schemes available from the government that help Buy to Let investors per se. However, if you are looking at a particular type of property and want to make it more energy efficient, some schemes are available from lenders.

They might let you borrow slightly more or offer you a contingency pot. Obviously that involves investing in the property to improve energy efficiency.

How important is property management for Buy to Let mortgages?

Becoming a landlord is an important responsibility. There are certain conditions that you have to meet, such as gas and electrical safety certifications.

The property has to be habitable. We always ask our clients if the property is somewhere they would live. If so, you’re doing a good job on it. If not, ask yourself if you’ve got the funds to do it up in the right way.

Look at the industry bodies that help landlords make the right decisions around maintaining and looking after property.

What are the consequences of defaulting on a Buy to Let mortgage?

It is very similar to residential. If you miss your payments on your mortgage, the ultimate consequence is that the property will be repossessed from you. You would still be liable for the debt on that property itself.

That’s why some of the stress tests and assessments lenders take are so stringent – to make sure your investment does pass affordability checks and the rental income versus mortgage payment makes financial sense.

However, it’s your responsibility to manage your costs and keep up the payments on that mortgage, because ultimately you could lose the property.

How can I add further properties to an existing Buy to Let portfolio?

We have clients that own multiple properties. Adding to a portfolio is very similar to buying a single property. The process is pretty much the same.

We look at the rental income from the property, understand the type of mortgage you want and how much you want to pay for that mortgage. Then you’re assessed. There are extra checks around your other properties to make sure they also meet stress tests.

We can look at the different stress tests because each lender has a different approach. We’ll see which lender fits your portfolio properties the best. But it’s very straightforward and we often see people mix and match – some properties are owned in an individual name and others are owned through a limited company. Each property is assessed individually with background assessments done on the wider portfolio.

What steps should a first time Buy to Let investor take before applying for a mortgage?

Speak to a mortgage broker early. We will highlight the things that to consider and the factors to understand before taking a decision to invest in property.

We also suggest doing some research in terms of where to buy and the market in that area. What does the rental market look like? How competitive is it? Are there too many rental properties there? Is it a mainly residential area?

FInally we make sure you understand your numbers. Again, that’s something we can help with. We assess all the costs, look at what deposit you need and any additional funds required. So the best thing you can do is speak to a mortgage broker to guide you through that whole process, step by step.

Please note: Your property may be repossessed if you do not keep up repayments on your mortgage.

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