Buy to Let Mortgages
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Buy to Let
Jess and Andrew tell us about Buy to Let mortgages and how they can help you buy a home.
What is a Buy to Let mortgage and how does it differ from a regular mortgage?
A Buy to Let mortgage works in a very similar way to a residential mortgage. It’s a loan secured against the property in order to purchase it.
The main difference between a regular mortgage and a Buy to Let mortgage is quite simply that you’re buying the property with the aim to rent it out, rather than live in it yourself.
What are the eligibility criteria for obtaining a Buy to Let mortgage?
Each lender has a slightly different approach. For example, some will only lend to borrowers who already own their residential home, with or without a mortgage. But some lenders will lend to First Time Buyers who are happy to stay where they’re currently living but want an additional income source or asset.
There are also age restrictions. Typically lenders have a minimum age of 25 and some lenders have a maximum age of 80. But in most instances there is a lender for any scenario – First Time buyers, younger or older clients.
How much deposit is usually required for a Buy to Let mortgage?
The minimum deposit requirement on a Buy to Let mortgage is usually 25% with the majority of lenders. A few lenders that can offer a smaller deposit, as low as 15% under certain circumstances.
It’s important to note as well that current market interest rates are slightly elevated compared to recent historic levels [podcast recorded in January 2024]. So the deposit requirement can often be higher than 25% – in some circumstances 40% to 50% depending on your individual circumstances.
Options available to help reduce the minimum deposit requirement can include purchasing through a limited company or a special purpose vehicle, where the stress testing is more lenient. That’s particularly relevant for higher rate taxpayers.
Should I choose interest only or repayment on a Buy to Let mortgage?
There is no right or wrong answer in terms of whether you go interest only or repayment. The most common repayment type on Buy to Let is usually interest only, purely for the reason that landlords want surplus rental income from month to month.
But a repayment mortgage may suit you best depending on what you want to achieve from your property. Some people want to pay down the balance on their mortgage and ultimately end up with a fully owned, mortgage-free asset. Speak to your mortgage advisor to discuss what repayment type suits you and your plans best, as everybody is different.
What is rental coverage and how does it affect Buy to Let mortgage applications?
Unlike on a residential mortgage, where affordability is purely based on the income and expenditure of the applicant, Buy to Let mortgages are actually calculated using the anticipated market rent on the property.
A calculation called a rental stress test establishes the maximum loan based on that rent. A typical example is that the market rent of the property needs to be approximately 145% of the mortgage interest payment, when stressed at an interest rate of, for example, 5.5%.
The stress test calculation can vary and is lower with some lenders, which could mean you could borrow more.
As mentioned around the limited company aspect, which is particularly relevant for high rate taxpayers, you could facilitate the use of a special purpose vehicle when you remortgage or buy a property.
Lenders may potentially be able to lend more because they offer a lower stress test. If you earn lots of money and are a 40% or 45% taxpayer, you might not be able to borrow enough on a personal basis – but you could potentially borrow more if purchasing through a limited company. We can advise you accordingly.
Are there any specific fees associated with Buy to Let mortgages?
Yes, there are a couple more costs to Buy to Let than for residential property. The majority of Buy to Let lenders do normally charge for a valuation fee, which normally ranges from £100 to £500, payable on full mortgage application. The survey values the property to make sure it’s suitable security for them.
You’ve also got a potential application fee which the lenders may charge to cover the admin costs associated with a Buy to Let mortgage. Unfortunately it’s usually non-refundable if the application does not proceed.
You’ve also got solicitor’s fees, just like a regular mortgage. Solicitors are involved in the process for a purchase and for a remortgage.
Something else to consider is the stamp duty, which is payable at an additional rate for Buy to Let or additional properties. Speak to specialist tax advisors around this, or contact your solicitor.
The final thing is management fees. When you have a Buy to Let property, you may wish to pay a company to manage the property on your behalf. They will charge you a percentage of your rent to be the point of contact for your tenant.
What factors do lenders typically consider when assessing a Buy to Let mortgage application?
The primary consideration when assessing a Buy to Let mortgage application would ultimately be the market rent – that’s what affordability is based on. The property itself is another consideration. Lenders look at the value of the property and the market rent to decide whether or not it’s suitable security.
The applicant’s overall credit worthiness is considered as well. Any adverse credit in the background could cause an impact on the mortgage application. Finally, any other Buy to Let properties you own can be reviewed.
Landlords might have one or two or many more properties. Lenders may consider the level of debt on those and how much rent they are achieving. Other financial commitments may also come into it, such as loans, car finance etc.
How can I find the right Buy to Let mortgage deals?
My advice is to approach a mortgage advisor to discuss your needs and objectives, so we can help you accordingly. The right Buy to Let mortgage deal does depend on your individual circumstances.
What are the implications of recent tax changes on Buy to Let mortgages?
The most impactful change is that landlords are no longer able to declare or offset the mortgage interest. All landlords usually submit a tax return to declare their profit from land and property, and previously you could declare the mortgage interests as an expense.
Now, they’ll offset 20% of the mortgage interest as a tax credit. If you’re a higher rate taxpayer that can have a much larger impact on you than if you’re a basic rate taxpayer. Your tax would be levied at 40% or 45% on any profits, while a basic rate taxpayer pays just 20%.
The solution to this can be purchasing and owning a property within a limited company – a special purpose vehicle solely designed for renting property. That way you can still offset the mortgage interest as an expense. That can be a particular benefit for a high rate or additional rate taxpayer.
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Can you explain the concept of remortgaging a buy to let property, and when it may be advantageous?
Remortgaging your Buy to Let property is very similar to a residential remortgage. The only difference is that the property is not your main residence.
The advantages of remortgaging could include obtaining a more favourable interest rate compared to falling onto the lender’s standard variable rate at the end of the term. Also, the features of the new mortgage could be more in line with your future plans and objectives. That might include no early repayment charges or having an overpayment facility, which perhaps your current lender didn’t offer at the time of buying the property.
Are there any restrictions on using a Buy to Let mortgage for properties in certain areas or for specific tenant types?
There certainly can be. There may be covenants on the title that restrict letting of properties in a particular area.
Something that’s been on the news recently is in regards to holiday lets. Certain locations at the seaside and tourist areas have placed restrictions on letting those second homes. The idea is to support local communities and deter people from buying properties in the area that aren’t owner-occupiers.
Leasehold properties may also require permission from the freeholder to sublet and specialist mortgages are needed when letting to specific tenants, such as students or people in houses of multiple occupancy. That’s where you might have seven or eight unrelated tenants living in the same house.
Letting to guests or tenants without permission can be deemed a breach of your mortgage terms and conditions. So if you are looking to let a property or have more specialised tenant types, you should seek advice from a mortgage advisor to obtain the correct product for your needs.
What are the potential risks involved in investing in Buy to Let properties?
I’d say the biggest risk would be rental voids between tenancies. It is really important that everybody has adequate provisions in place to cover periods of no rental income.
Another risk, depending on fluctuations and property values, could include negative equity. However, the minimum deposits required when purchasing a Buy to Let property make this quite unlikely.
As the property may be one of several, including your main residence, you should consider the time involved in managing these properties. You might prefer to instruct a management company to look after a property on your behalf. This can be helpful if you’ve got a busy life and aren’t available to be at your tenant’s beck and call if there’s a problem.
What are the current trends and market outlook for Buy to Let properties in the UK?
Interest rates seem to be coming down at this moment, albeit slowly. Admittedly, the Buy to Let market is relatively depressed currently, and we don’t expect that to change over the short to medium term.
If the government were to introduce some incentives for Buy to Let, perhaps support for mortgage interest or if mortgage interest tax policies were reintroduced, it might spur on investors to get more active in the market and increase their portfolios.
That would make rental properties more available within the open market and also stop the cycle of landlords selling properties instead of buying them.
Are there any government schemes or support available specifically for Buy to Let investors?
Unfortunately not. There aren’t any government schemes at the moment. The government’s main priority is to help First Time Buyers get onto the property ladder. They aren’t really in the market to boost property owners to buy more properties.
How important is property management for Buy to Let mortgages?
Property managers can ultimately save time and money for Buy to Let landlords, especially if fully managed. If you’re managing the property yourself, you’re essentially at the beck and call of your tenant – and if you’ve got your own full time job alongside that, you may not want that direct relationship with the tenant.
A property management agent – usually as part of an estate agent – would handle that day-to-day contact for you and possibly save money in the long run. You need to take these management costs into consideration when calculating the viability of your asset.
A fee between 5% and 15% is normal for a fully managed property, although that can change with fluctuations in the market. Another factor to consider on Buy to Let mortgages is that this management fee may go into the application as a commitment, and can potentially reduce the amount you can borrow. But some lenders don’t consider this at all.
What are the consequences of defaulting on a Buy to Let mortgage?
The main consequence is long-term damage to your personal credit file, which ultimately impacts your ability to obtain finance in the future, including mortgages.
Some lenders would not accept a remortgage application If you’ve defaulted on your existing mortgage. Another possibility is that your property could be repossessed if you continue to default on your mortgage. Some lenders have the ability to take control of the tenancy of the property and manage it for you, with any income received and retained by them to clear the arrears that you owe.
Can you explain the process of adding additional properties to an existing Buy to Let portfolio?
The process itself is more or less the same as obtaining your first Buy to Let property. The lender will most likely factor in any background properties that you hold. So if they’re not tenanted at that time and you’ve got a rental void, that might impact your ability to purchase a new property. You’ve got no income coming in for the first property you hold on a Buy to Let basis.
Once you own more than three properties, you’ll be considered a ‘portfolio landlord’. It can place some restrictions on your availability for mortgages. Some lenders restrict the number of properties you’re allowed to hold in the background – it might be 10, for example, but it does vary significantly from lender to lender.
Another factor is that they apply a stress test to the background properties as well as the new property. If you’ve got a high level of debt on those properties and possibly one or two are not tenanted at that moment in time, it’s quite possible that you’ll fail the stress test on the portfolio, rather than the subject property.
As advisors, we’d have a look at your portfolio and check your overall indebtedness compared to the value of your property portfolio. We do all the calculations for you and then place you with the most appropriate lender.
What steps should a first time Buy to Let investor take before applying for a mortgage?
Seek advice from a mortgage broker to establish your needs and objectives. This is a key part of the process and a good place to start. It’s important to establish the costs involved with purchasing the property – stamp duty, application fees, legals and the running costs of the property. That will indicate the viability of the investment and its profitability.
If running costs including the mortgage outweigh the expected rental income, you will need to find a more suitable property that will be sustainable long term for you.
PLEASE NOTE: Your property may be repossessed if you do not keep up repayments on your mortgage. The Financial Conduct Authority does not regulate some forms of Buy to Let Mortgage