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?
It’s a type of mortgage specifically designed to buy a property as an investment and rent it out. The rent effectively pays the mortgage, and cash flow over and above is your profit.
In terms of how it differs from a regular mortgage, it is underwritten differently, which means there are different lending criteria around a buy-to-let mortgage.
Note that they’re classed as non-regulated or unregulated mortgages – so you don’t get the same protection as with a residential mortgage. This is generally an investment or a commercial transaction, so you lose some protections.
What are the eligibility criteria for obtaining a Buy to Let mortgage?
The eligibility criteria for obtaining a buy-to-let mortgage are very varied, and lenders have many different policies on this.
It’s impossible to explain all of them, but you need to be a UK citizen and have the minimum deposit. You generally need a reasonably good credit rating, and many mortgage lenders would like you to already own a home. That’s not always the case, but if you already own your home, you have experience of paying a mortgage.
Lenders consider your deposit, the type of property, and whether it’s readily lettable.
Can you buy it and immediately put it on the market to rent? It’s also about how much rent that particular property will generate and whether that meets lending policy.
How much deposit is usually required for a Buy to Let mortgage?
Typically, the deposit for a buy-to-let mortgage is 25% of the property value. That does vary from lender to lender, but it’s generally 25% or above.
What is rental coverage and how does it affect Buy to Let mortgage applications?
This can be quite complex. It’s basically about how much rent is coming in. The lender applies a calculation to prove that the buy-to-let mortgage will be affordable.
It’s the mortgage amount multiplied by an interest coverage ratio (ICR). They apply a stress test to determine whether that mortgage will pass their lending policy.
Each lender has their specific calculation, but it effectively confirms whether the rent they think is achievable will cover the amount you need to borrow.
Are there any specific fees associated with Buy to Let mortgages that borrowers should be aware of?
Fees tend to be slightly higher—not always, but in many cases. There can be booking fees, product fees, and additional valuation costs.
One of the big things to be aware of is that if you already own a residential property, you may have to pay an additional stamp duty land tax. That’s something that you need to factor in.
Broadly speaking, the fees remain the same as for a residential mortgage, but there may be additional costs.
Should I choose interest only or repayments on a Buy to Let mortgage?
It depends on your plans. Many buy-to-let landlords choose interest only because it means the mortgage payment is lower. If a good rental income comes in, the difference between the mortgage payment and the rental payment is your profit.
Of course, on a repayment basis, there may be less cash flow, but the mortgage is being repaid. It’s crucially important to understand that at the end of the term, on interest only, the amount you borrowed will remain outstanding. The lender will want it repaid at that point.
It all depends on your goals. When you talk with your broker, make sure you have a clear idea of why you’re buying an investment property—then we can guide you on the best options for your circumstances.
What are the implications of recent tax changes on Buy to Let mortgages?
We have to be careful, because of course mortgage brokers aren’t tax advisors.
Essentially, the taxable income from Buy to Let mortgages has changed. It’s important to speak to an accountant when you’re considering buying a Buy to Let to understand what your obligations will be in terms of returns to HMRC, etc. Tax advice has to be done on a case-by-case basis.
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Are there any restrictions on using a Buy to Let mortgage for properties in certain areas or for specific tenant types?
Yes, there are many restrictions on buy-to-let mortgages. In some areas of the country, you may need to obtain licences.
For example, if you’re looking to buy a house of multiple occupations (HMO), there are specific buy-to-let mortgages for those types of properties.
There are restrictions and different types of tenants. They may be assured shorthold tenancies. It may be an HMO. It’s a big subject. The best thing to do is speak to a broker because there’s so much to unpack there.
Are there any government schemes or support for Buy to Let investors?
I’m not aware of any because buy-to-let is a commercial transaction. You’re buying it for investment purposes, and the government isn’t really there to support that.
You, as the investor, must ensure you have the deposit and capability to proceed with that investment.
How important is property management with Buy to Let mortgages?
When you buy a buy-to-let property, you may want an estate agent to manage it for you. They’ll charge you a percentage of the rental income for that.
We have to remember, too, that a property does need repairs. There will be wear and tear. A boiler can break down, a window could be broken, or a bathroom might flood. How you would want to manage that depends on how involved you want to be as a landlord.
It’s not as simple getting a mortgage, finding tenants and walking away. That property does need a good level of upkeep. There are various things that you must do as a landlord for example – making sure that the property is fire safe etc. It’s really important to think about that and what that cost might be.
What are the consequences of defaulting on a Buy to Let mortgage? What are the potential risks involved in investing in Buy to Let properties?
If you default on a Buy-to-mortgage, the lender can ultimately repossess that property. You would have a repossession on your credit profile, which can have implications for getting any credit for quite some time.
There are numerous risks involved with investing in buy-to-let properties. One risk is that the property decreases in value, resulting in negative equity. This is less likely to happen because of the deposit requirements with buy-to-let properties, but it can happen.
You may also find that a tenant stops paying rent, in which case that mortgage payment falls on your shoulders. It could be that the tenants don’t look after the property and you have to spend money refurbishing it before letting it out again.
A big one is if you buy a Buy to Let and put it on the market to rent, and no one actually comes to rent it. That’s classed as a rental void. How will you be able to sustainably pay that mortgage if you don’t have the rent coming in?
There are many risks to consider. It’s not quite as simple and stress-free as people might imagine.
How do landlords add additional properties to an existing vital portfolio?
Generally, lenders want to understand your current portfolio, the aggregated borrowing, and its value. They’ll also want to know the interest coverage across the portfolio.
So it’s important to keep track of your portfolio in terms of the value of the properties, the mortgage sizes, the rent etc. When you come to increase your portfolio you need all that information readily available so that a broker can make a good recommendation for the next property.
What steps should a first time Buy to Let investor take before applying for a mortgage?
If it’s your first time buying a property to rent out, be aware of all your legal obligations as a landlord. What happens if the property is empty? What happens if the tenant stops paying rent? What happens if the property decreases in value?
It’s more involved than people sometimes realise. If you buy a buy-to-let for investment purposes and receive rental income, that’s typically counted as self-employed income, so there’s also accounting to consider.
There are many factors to consider, not least the deposit requirement of 25% or more. So, speak to a broker for advice before you make any decisions, and then take it from there.
How can a mortgage broker help if somebody is looking into a Buy to Let mortgage?
We search the market to ensure that you’re getting the right deal for your circumstances. We can also help explain the process of buying a buy-to-let and the costs and fees involved.
We also highlight some of the pitfalls because it’s not for everyone. It’s not the easiest way to make money. You have to go into it with your eyes wide open. Be aware that you won’t have the kind of protections as with a residential mortgage.
Make sure you’ve taken the necessary steps to understand all your rights but also all your obligations. Get that advice to understand things you may not have thought about before making that decision.
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.
