Buy to Let Mortgages
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Buy to Let Mortgages
What is a Buy to Let mortgage? How does it differ from a regular mortgage?
A Buy to Let mortgage is just a mortgage designed for individuals who want to purchase a property to rent out.
There are a few key differences with a Buy to Let as opposed to a standard residential mortgage. First is the deposit. Normally with a Buy to Let, you’ll need at least a 20% to 25% deposit, which is a lot higher than a standard residential mortgage. Interest rates and fees will generally be higher with a Buy to Let mortgage.
The next fundamental difference would be the repayment structure. Whilst most residential properties are bought using capital repayment, where you pay back interest and capital to the lender, a Buy to Let mortgage is typically interest only. Your monthly payment will therefore generally be less.
Another difference is how they’re regulated. Residential mortgages are regulated by the Financial Conduct Authority, (FCA), whereas most Buy to Let mortgages are non-regulated – unless you’re renting to close family members.
What are the eligibility criteria for obtaining a Buy to Let mortgage? What factors do lenders typically consider when assessing a Buy to Let mortgage application?
Some lenders want a minimum income from the mortgage applicant, typically £25,000. Equally, other lenders don’t need proof of income, but that will reduce the choice as less lenders are on that route.
When they don’t need proof of income, lenders tend to want rental yield to be exceedingly strong to make sure everything stacks up. Deposits, as we’ve already mentioned, are typically between 20% and 25%. Lenders also look for a good credit history. A strong credit score for a Buy to Let landlord is a good starting point.
Age is another significant factor, and applicants generally need to be at least 21. Potentially lenders set an upper limit by which the mortgage term must finish. It’s typically 70 to age 80, depending on the lender’s criteria.
The next factor is rental income, which has a significant bearing on whether a lender is going to lend or not. They want to ensure that the rental income will cover somewhere between 125% to 145% of the monthly mortgage costs. The rent needs to cover the mortgage and leave some profit for the landlord – and less risk to the lender.
The final point is experience. Some lenders will only lend to experienced landlords with a track record, where you have a residential property and perhaps other rental properties as well.
Some lenders, however, will lend to First Time Buyers and first-time landlords. Again, that would limit the number of lenders available.
On top of that, lenders will want to evaluate the property. The location and any existing property portfolio you have may also be considered.
How much deposit is usually required for a Buy to Let mortgage?
25% is the typical requirement. Some lenders may allow a 20% deposit, but it’s less common and less likely that a 20% deposit will fit with the rental yield calculations. The rent would have to be exceedingly good to get it through at 20% nowadays.
Can you explain the concept of rental coverage and how it affects Buy to Let mortgage applications?
Rental coverage measures how much rent is needed to cover the mortgage. Lenders use what they call a stress test, with a hypothetical interest rate that’s usually higher than the current rate they’re offering. It means there’s a bit of a buffer.
On top of this, they will check that the rent covers at least 125% to potentially 145% of the mortgage payments. It’s typically 125% if you’re a standard taxpayer, and 145% when you’re in the middle tax band and the higher rate band.
It just ensures that there is a margin for the lender and the landlord. As I say to a lot of our clients, if it doesn’t pass the stress test, it probably isn’t a particularly good investment, because the margins are too tight.
Are there any specific fees associated with Buy to Let mortgages to be aware of?
Borrowers should consider that with Buy to Lets, you’re invariably going to have lender arrangement fees. These can range from nothing to over 3% of the loan. They can be quite significant.
That really needs taking into account when you’re buying a property. Within our research as a broker we will always lay out the differences, so you can see options with hopefully no fees, with a middle ground fee and with an upper fee.
You tend to find that the higher the fee, the lower the rate will be. If there’s little or no fee, the rate will be high. Depending on how much you’re borrowing, we will work out which is going to be most cost effective for you.
You’ll then have valuation fees for the property survey and assessment. Additional costs could be things like letting agents fees, service charges, stamp duty and – not to be forgotten – income tax on rental income. They all need to be considered when buying a property on a Buy to Let basis.
Should I choose interest only or repayment on a Buy to Let mortgage?
Most landlords prefer interest only mortgages for lower monthly payments, which obviously increases the potential profit on an annual basis.
It also gives them greater flexibility to potentially invest in more properties. However, you’ve got to remember that on interest only, at the end of the mortgage term you’re still going to owe the amount you borrowed in the first instance.
Repayment mortgages can be used for Buy to Let. Again, it’s just making sure it all passes the affordability calculations. The advantage with a repayment mortgage is, providing you make your monthly payments throughout, you’re going to pay that loan off – it will be gone at the end. But typically interest only is the proven route for most investment landlords.
What are the implications of recent tax changes on Buy to Let mortgages?
From the most recent Budget on 31 October 2024, the most significant factor was that the stamp duty surcharge on second homes increased from three to five percent. That’s a significant increase for landlords to take into account when buying a property.
However, there was a positive. Despite a lot of talk and speculation regarding capital gains tax and inheritance tax rates and relief, the good news is that there were no changes at all to these, providing some relief for landlords.
Are there any restrictions on using a Buy to Let mortgage for properties in certain areas or for specific tenant types?
Yes, and these can include location. For instance, lenders may have less appetite for properties near universities or where there’s a high number of Houses in Multiple Occupation (HMOs) – that’s multi-room lets.
Lenders don’t like to oversaturate certain areas. It’s always important if you’re looking at HMOs or property near a university to check it out with a broker. Oversaturation can happen and lenders just won’t lend in those areas.
There may also be some restrictions around property type, which can include new build flats, high rise flats, flats above commercial premises, or perhaps semi-commercial units and holiday homes. If you’re looking at that type of property, get it checked out.
And a new one is EPC ratings, which is property energy efficiency. New tenancies must have an EPC rating of C or above. Many landlords are doing retrospective and remedial work on properties to get them ready for that.
If you’re looking to buy as a landlord now, one of the things to check with the agent is the EPC rating for the property.
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Are there any government schemes or support available specifically for Buy to Let investors?
Yes, there are, but how beneficial they are is debatable. Firstly there’s what’s called the Great British Insulation Scheme. This is provided by the government and provides free or potentially cheaper insulation for properties with EPC ratings of D to G.
With that EPC factor now having to be C or above, this is something landlords could apply for.
A second one, which has a similar purpose, is the Boiler Upgrade Scheme. Again for property owners including landlords, it’s to replace fossil fuel heating systems.
Both incentives are there for UK landlords to potentially apply for to assist with upgrading properties. You can get more information on the government website. [information is correct at the time of recording in November 2024].
Can you discuss the importance of property management and its impact on Buy to Let mortgages?
I’ve had personal experience of this with a landlord in recent months who let a property become a little neglected.
Effective property management is really important. It ensures the property remains in good condition, which is a fundamental part of your mortgage terms, the building’s insurance requirements and the lender’s expectations.
If it’s managed incorrectly, it can impact your borrowing ability. In the example I’m thinking of, the landlord wanted to borrow further against the property, but he was very restricted because of how the surveys were coming back.
The EPC rating wasn’t strong enough, and the property wasn’t in adequate condition. They had to complete some work to allow them to borrow more money. It can affect the whole of a portfolio if property is poorly maintained, so it’s a significant factor for landlords to take into account.
Overall, that’s a good thing – because we see so much in the press about rental properties not being kept up to standard and problems with damp. It’s a good measure to ensure landlords manage properties effectively and properly.
What are the consequences of defaulting on a Buy to Let mortgage?
It really doesn’t make any difference whether the property is part of a Buy to Let portfolio, is an individual Buy to Let or indeed a residential property. Any default is going to cause problems.
The worst case scenario is that a lender could consider repossession and sell the property. From a landlord’s point of view, defaults will impact their credit file for up to six years, which could cause problems with remortgaging. If you’re coming towards the end of a rate or you’re wanting to release equity, a default could make that difficult. You may end up on higher rates or, in the worst case scenario, lenders may not lend.
This becomes more of a challenge if you’ve got a big portfolio, because it could put a strain on the rest of your properties as you come to remortgage them in the future. It’s a big thing to consider.
What are the potential risks of investing in Buy to Let properties?
The risk of default is a very important one, as we just mentioned. Another is that markets fluctuate in terms of property values and rent.
Landlords need to think not just about profits that can be made, but also what happens if you have a rental void. Can the monthly payments be made in that situation? If not, how would that affect your credit moving forward?
There are also unexpected maintenance costs – if a boiler breaks down or windows need replacing etc.
Going back to EPCs and the importance of those, landlords need to maintain properties more – so that’s something really to take into account.
Can you explain the process of adding additional properties to an existing Buy to Let portfolio?
The process is very much like acquiring any Buy to Let property, but lenders will generally have portfolio limits. They may have a certain amount of lending in a particular area, or portfolio limits where they stress test not just the property you’re buying, but your whole portfolio.
They look at whether the portfolio is profitable and fits their criteria. For landlords, keeping really detailed records of each property is crucial: when you bought it, who the lender is, the account number, how much you owe on that particular property and what your rent is. You then need to keep that up to date.
We actually have a mortgage app called Sussed, which allows a landlord to store all their portfolio information. It makes it much easier if you’re looking to buy another property if you’ve kept all the information up to date. We can stress test it really quickly.
Equally, if you are looking to release equity across your portfolio to buy another property, it becomes easier to review that information quickly and update it. It just makes the whole process of managing a portfolio that little bit simpler.
What steps should a first time Buy to Let investor take before applying for a mortgage?
Very much like any mortgage, it’s about getting organised. The key steps are to make sure you’ve got a good strong credit score and have at least a 25% deposit. Be wary of age restrictions – are you over 21 and under maximum age, which tends to be 80?
From an income point of view, check out with a broker whether you meet the minimum requirements. The next thing is the property type, making sure the property is suitable for single unit letting and will pass the EPC at grade C or above.
I would always recommend consulting with a professional broker. If you’re a first-time Buy to Let investor, there are lots of nuances and variations in interest rates and criteria. Consult with us. We can help you navigate these requirements more effectively and hopefully minimise any stress and effort.
You’ve demonstrated brilliantly how a mortgage broker can help here, but have you got any final thoughts?
The final point is reminding everybody what a broker adds to the party – and that is access to a range of lenders. We offer advice and recommendations across a wide range of lenders and schemes because we’re independent and whole-of-market.
We conduct professional research for landlords to compare all the deals, interest rates and overall costs and provide guidance around that. It’s also helping, as I mentioned on Sust, with portfolio management and reducing the stress and paperwork for landlords.
Working with a trusted broker can save an awful lot of time, stress and money, especially in the Buy to Let market.
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.
Our standard fee for arranging a mortgage is £395. The fee is due upon applying for a mortgage loan with the lender.