Buy to Let Mortgages
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Buy to Let Mortgage
What is a Buy to Let mortgage and how does it differ from a regular mortgage?
A Buy to Let mortgage is simply a mortgage on a property that is let out. You can’t live there yourself – that would be a residential mortgage.
What factors do lenders consider when assessing a Buy to Let mortgage application?
Some lenders require you to have experience as a landlord, and also be an owner-occupier, which is basically already owning the property you live in. I do have certain lenders that are okay with first time landlords and even First Time Buyers.
Lenders typically look at the rental income on a property to assess the amount that they will lend. They all have different stress test calculations.
How much deposit is usually required for a Buy to Let mortgage?
Generally it’s 25%. Most lenders offer 75% Loan to Value, but a couple of lenders out there are okay with a 20% deposit as well. The interest rates are slightly higher, but if you’ve only got a 20% deposit it’s not the end of the world.
Should I choose interest only or repayment on a Buy to Let mortgage?
It’s really down to what you want to do. Most people go interest only on an investment property, to keep the mortgage payment down so they make more money from the rental income.
A small percentage go capital repayment. It’s your choice. You may just want to end up with a debt free asset at the end of the mortgage – but that isn’t generally the the way most people do it. They want to make more money monthly from the investment.
What are the current interest rates for Buy to Let mortgages?
They are approximately 5% or thereabouts at the moment [podcast recorded in March 2024]. But some lenders currently are lowering the rate by around 1% but then they put a large product fee on the deal.
If the interest percentage is lower, they can lend more – but you do pay for it another way with that substantial product fee. You can add that to the loan, but it may increase your payments.
Can you explain the concept of rental coverage and how it affects Buy to Let mortgage applications?
In 2017, some changes were introduced by the Prudential Regulatory Authority (PRA) that meant lenders have to apply a lot of strict criteria for Buy to Let borrowers.
They now measure affordability for Buy to Let mortgages by putting a ‘buffer’ on the rental income – it could be either 125% or 145%. That’s called the ICR – income cover ratio – and they apply it to ensure that the borrower has enough surplus rental income from the property to pay for things like repairs and service charges, etc.
Lenders also apply stress tests on the application, which is generally an interest rate of 5%. 5.5%, or 6%. Even if the interest rate on the mortgage is lower, they stress test it higher. Certain things affect it, including the length of the deal.
Sometimes they’re a lot more lenient on a five-year fix than a two-year fix. They may lower the stress test to around 4.5% in those instances.
They also increase it for the high rate taxpayers rather than lower rate taxpayers. Generally it’s a lot harder than ]it used to be. Since October 2022, I’ve had customers that could borrow £100,000 than they could a couple of days before. [Podcast recorded in March 2024]
Are there any specific fees associated with Buy to Let mortgages that borrowers should be aware of?
With residential mortgages, you don’t generally have a valuation fee, but it’s more common on Buy to Let mortgages. They tend to charge a valuation fee of between £300 and £600.
Sometimes the product fee can be quite large. On a residential mortgage, if there is a fee it’s typically £999. But most Buy to Let mortgages have a fee, either around the £1,000 mark, or as much as 3% of the loan amount. For example, on a £200,000 mortgage, that’s a £6,000 product fee. It’s pretty hefty.
What are the implications of recent tax changes on Buy to Let mortgages?
We’re not allowed to offer tax advice as we’re not tax advisors, so we generally advise customers to check with HMRC online about what the tax rules are.
They have tightened these and there are certain limits on what you can offset against the rent for income tax. It’s not as much of a benefit as it used to be, and Buy to Let is less of a money-making machine than it once was. But people still make money out of it and the property value still ends up increasing in the long run. You will still have an extra asset, which is always a good thing.
How do you remortgage a Buy to Let property and when is it a good idea?
Similar to the residential side of things, we would contact our customers about six months before the end of their fixed period, to make sure they don’t go on to the standard variable rate. The standard variable rate is always very high so you don’t want to go on to that, if you can help it.
Some people remortgage their Buy to Let property to capital raise and take money out to do home improvements or consolidate some debt. A lot of investors remortgage to take money out of a property to buy another one and increase their portfolio. That’s generally why you would remortgage.
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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, but this will be down to my research. We will look at lenders’ criteria to find the most suitable option for you. Certain lenders are okay with student accommodation and all are happy with family units.
Fewer will accept a house in multiple occupancy where you have all unrelated tenants. Some lenders need all tenants to be on the same tenancy agreement while others are comfortable with them being on separate ones. These are all things we’ll look at as a whole.
Similarly lenders may focus on certain areas, say perhaps if you’re buying property in Scotland or Ireland. We would bring all those criteria into one.
What are the potential risks involved in investing in Buy to Let properties?
There are certain risks. Tenants can stop paying rent, in the worst-case scenario, and you have to evict them. That can be a lengthy process, trying to get them out of the property. Obviously, then you’re stuck for a long period without receiving any rent, and you’re paying the mortgage on it. It’s not the best situation to be in, so that is a risk.
Also, like any property, there are risks of things going wrong on the maintenance side. You might need a new roof, and that’s not cheap. It’s always good to have money set aside in an account for an unforeseeable event.
What are the current trends and market outlook for Buy to Let properties in the UK? [podcast recorded in March 2024]
Since July last year, the rates have been going down, but in the last three weeks, they’ve started to rise again. Hopefully, that’s not going to be an ongoing trend. But none of us know what the future holds. None of us would have predicted what has been happening over the last two or three years – or four years since Covid.
The Bank of England rates put the base rate up nearly 15 times in the last two years, and nobody would predict that either. So it’s difficult to say what the future holds.
Are there any government schemes or support available specifically for Buy to Let investors?
No, there aren’t, really. It’s only on residential properties where you get the Help to Buy schemes and the new build schemes. There may be some new build offers on Buy to Let property, the same as residential, but often you don’t get the same help as an investor.
How important is property management for Buy to Let mortgages?
I think it’s important to have. Some people manage the property on their own. It’s down to personal preference and the situation. If you live a long way away and anything goes wrong with the property, it can be quite stressful.
A lot of estate agents do offer property management services. There costs associated with it, generally around between 8% and 12% of the rental income. So you are spending that amount every month and losing extra profit, but you get peace of mind. It’s important to have that, especially if you own multiple properties as it can be very stressful if things go wrong.
Some lenders will factor in its effect on your monthly profit, but most lenders base it on the gross rental income so it shouldn’t affect the mortgage in a big way.
What are the consequences of defaulting on a Buy to Let mortgage?
It is similar to defaulting on a residential mortgage. But on Buy to Let mortgages, lenders are more strict on whether they will lend with certain credit issues, so it’s going to affect the possibility of remortgaging with another lender at the end of the fixed period.
If you’ve got a default on your credit file, most lenders will not be looking to take you on, unfortunately. Any default – on a mortgage, credit card or loan or anything – will stay on your file for six years, even if you paid it off and you’re now up to date.
How can I add additional properties to an existing Buy to Let portfolio?
Usually you just find another property and get another mortgage, really. But some lenders will stress test the whole portfolio, not just the new property. They may put an overall Loan to Value limit on the whole portfolio.
A portfolio is classed by certain lenders as three or more properties, any by some as four or more properties. That would affect how they stress test the whole scenario.
What steps should a first-time Buy to Let investor take before applying for a mortgage?
You need to ensure that your credit file is all good and up to date. That gives you access to all the lenders. If you’ve got issues on your credit file, it can bring that choice down.
Contact us and if you give us a rental income, we can find out what the maximum amount is achievable for your borrowing. With residential, it’s done on your own income, whereas with Buy to Let properties, it’s calculated on the rental income – that’s how they stress test it.
We would give you all the advice you need and look at the best available option for you and make personalised recommendations.
YOUR HOME 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.
