Buy to Let Mortgages

Buy-to-Let (BTL) Mortgages are for landlords looking to purchase a property to rent out to tenants. This may be to help boost their income now, secure a better retirement income, invest longer term in property to name but a few. There are a number of important factors to consider when taking out a BTL mortgage, such as the type of property you’re looking to buy, the expected rental for that property and the area.

The property could be purchased in your sole name / joint names or in the name of a registered Limited company you own.

Lenders will not only look at your personal income and outgoings but also focus on the expected rental income when deciding on how much to lend

How do they work ?

Buy-to-let mortgages are very similar to residential mortgages. The  key differences are:

Higher fees: The fees tend to be higher.

Higher interest rates: Interest rates on buy-to-let mortgages are usually higher than residential mortgages

Increased Deposit: The minimum deposit for a buy-to-let mortgage needed is 20% of the purchase price

Interest-Only Mortgage: Most BTL mortgage lenders are happy to lend on an interest-only. This means you only pay towards the interest on the mortgage loan each month, and not the actual debt itself. This means that your mortgage repayments will be lower each month, but the size of your mortgage debt will not decrease unless you make additional payments towards the capital or convert it to a repayment mortgage.

This is mainly due to the fact they are seen as an investment and the sale of property can be accepted as a repayment vehicle to repay the loan at the end of the interest only term.

Affordability Assessment: The rental income from your tenants will be taken into account when assessing whether you can afford the mortgage payments. Most lenders will want to see that the rent covers 125% of the monthly interest mortgage payment.

Unregulated: Most BTL mortgage lending is not regulated by the Financial Conduct Authority (FCA). There are exceptions, for example, if you wish to let the property to a close family member (e.g. spouse, civil partner, child, grandparent, parent or sibling). These are often referred to as consumer buy-to-let mortgages and are assessed according to the same strict affordability rules as a residential mortgage.

For consumer BTL mortgages, advising, arranging, lending and administering the mortgage is protected under the same laws as residential mortgages and is regulated by the Financial Conduct Authority (FCA).

Main requirements for a Buy to Let mortgage ?

The loan amount and interest rate are typically based on:

• Property Value
• Your deposit. The minimum deposit is usually 20%. Many lenders historically have a minimum of 25%
• Your personal circumstances ( income, credit score, outgoings, whether its in personal or a company name
• The expected rental income which will be verified by the valuers
• The type of Let e.g. is it going to be a home of multiple occupancy (HMO) or a standard buy to let to an individual/family 

What are some of the risks ?

The below list is not comprehensive but some of the main risks to take into consideration on a buy to let are:

1. Tenants defaulting on payments. If they stop paying then you have to still cover the mortgage payments. The process to remove tenants from your property can be a lengthy and costly one
2. Void periods. There may be times where the property is not tenanted. The mortgage payments still have to be paid
3. Repairs and maintenance. Unexpected repairs could be costly and time consuming. If a tenant has not taken good care of your property there may be a need to further maintenance in between tenancies.
4. Legislation changes. New tax changes are seen to have made it a less attractive option for some landlords as well as changes in legislation giving tenants more power rights than previous rules.

What are the additional costs with a buy to let property ?

Buy to let properties will have additional costs to pay that would not be associated with a residential property

1. Minimum deposit needed is 20% to 25%
2. Stamp duty land tax - higher rates are payable on second homes and buy to let properties
3. Mortgage arrangement fees - these can be higher with some lenders
4. Interest rate on a buy to let is typically higher than on a residential mortgage
5. Maintenance and repairs are more likely and at times unexpected
6. Landlords Insurance to ensure the property against damage and loss
7. Buildings insurance can be higher due to the higher risk of a tenant(s) living in the property
8. Letting agent fees associated with finding and maintaining tenancies
9. Tax- you will need to pay income tax on any profits generated

I am a first time buyer, can I get a Buy to let mortgage ?

In short the answer to this is YES. However it may be that the lenders request a higher deposit (typicall 30%) due to your inexperience perceived as higher risk. This can also mean the application process is more complex and time consuming. This is where the expert advice of a broker comes in to make the process as smooth as possible.

Talk to a broker

When compared with residential mortgages, finding buy-to-let mortgage deals can be more difficult and time-consuming. It's important to remember that each lender has different criteria for approving buy-to-let mortgages, so it's always best to speak to a mortgage broker before you apply. They'll be able to assess your individual circumstances and match you with the most suitable lender.

Your Mortgage Ghai is on hand to answer any questions you have about buy-to-let mortgages. We can help you find the right mortgage for your circumstances and guide you through the application process.

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