Buy to Let mortgage
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Michael Tilston explains the Buy to Let mortgage process.
What is a Buy to Let mortgage and how does it differ from a regular mortgage?
A Buy to Let mortgage is a mortgage on a property that you’re intending to let out, either to a family or multiple individuals. Generally it’s based on the rental value of a property rather than income.
It usually involves a higher deposit to get a Buy to Let mortgage compared to a standard two-up, two-down, where Mr and Mrs are buying for the first time.
What are the eligibility criteria for obtaining a Buy to Let mortgage?
It’s different with every lender, but that’s why you come to see a lovely mortgage broker like ourselves. Generally, you’d need a 25% deposit. Some lenders do it with slightly less, but 25% is the standard.
Most lenders do like you to own your own property first, but again, not all. Your personal circumstances are key. Some lenders also have a minimum income criteria.
So this is why it’s worth speaking to an advisor – it’s not as straightforward as multiplying your income by 4.5 and that’s what we could borrow. It’s very different. It is going to be down to how much the property subsequently rents for, what your tax status is and a multitude of things.
How much deposit is usually required for a Buy to Let mortgage?
25% is the standard for most lenders in the Buy to Let market. Obviously, the more deposit you have, the more profit you’ll make on your rental income. Generally speaking the rates will be higher if you put down a smaller deposit. It’s the same with traditional residential mortgages.
Should I choose interest only or repayments on a Buy to Let mortgage?
It’s very much down to your own personal circumstances. Your end goal is key – is this something you want paid off over a period of time and left as a legacy for your family? Or do you want to be unencumbered at the end of the mortgage term?
You could still have a repayment mortgage, but it changes how much you’re paying each month and how much profit you’re making.
If you’re looking for your Buy to Let to predominantly be an income provider, a lot of landlords go for interest only. Their money is in the property in the form of their equity stake or their deposit. Any difference between the mortgage and the rent received, minus any tax and fees, is their profit. So to maximise profit you would choose interest only, while if it’s more about paying it off in the longer term, repayment might be the best choice.
What are the current interest rates for Buy to Let mortgages?
Rates are changing daily at the moment in November 2023, which is great fun. We’re looking at rates around 5% to 5.5% for a standard five year fixed deal. That’s roughly where they stand right now.
Can you explain the concept of rental coverage and how it affects Buy to Let mortgage applications?
Lots of changes have been brought in recent years with regards to people’s tax status. These affect what you can borrow on a mortgage when it comes to ‘interest rate coverage’.
The higher the rent, effectively, the more you can borrow. In some circumstances, with rates being higher, it can be harder to borrow the maximum of 75% against a straightforward two-up, two-down – because it’s difficult to get enough rent compared to the property value.
If you’re a basic rate taxpayer, generally speaking you can borrow a little bit more on the same rental income than a higher rate taxpayer. That’s worth keeping in mind, and why it’s worth seeing your mortgage broker in advance.
Get a good idea of what you’re looking at. Speaking to estate agents if you’re looking at an investment property, to understand what it would actually realistically rent for every month.
Are there specific fees associated with Buy to Let mortgages?
It’s always been the case that Buy to Lets have higher fees than residential. It’s probably not that surprising, because investors are looking to make money.
Buy to Let is classed as a higher risk to a lender, because most people would fight tooth and nail for their home, but when it’s an investment, people can be more likely to walk away. Because of that, rates are a little bit higher and so are product fees.
You will also have additional costs if you own another property. You will have additional stamp duty at 3% of the overall purchase price on top of normal stamp duty. If you start getting into the more complex Buy to Lets, where you might buy through a limited company rather than as an individual, there are more costs. You might have to pay for independent legal advice and separate representation via two sets of solicitors.
That’s also when you start getting into niche lending. We do have lots of landlords that own their properties through a limited company. We would always go through what those fees would look like so you’ve got a good idea of the costs of going down that road.
What factors do lenders typically consider when assessing a Buy to Let mortgage application?
It’s quite similar to residential – they still want to make sure that you’re a good financial risk by looking at your credit record. They are lending a considerable amount of money for you to buy your investment property, so they want to know that you are likely to keep making your mortgage repayments.
As a landlord, you might have rental voids, where your property might be empty or you’re doing some work to it. They want to know that you can still afford to pay that loan should anything happen.
So the rental income and your credit score are the main things. The kind of property is also important – is it a house of multiple occupancy? Are five or six individuals renting a property together? This is very popular in university cities where you might have students or young professionals sharing a house.
It all depends on all of those different factors, including proximity to a university or a hospital, or what the rental market is like in that area. If the home or area has traditionally always been owner-occupier, sometimes lenders might not like that. On the flip side, if everyone rents in that area, a lender might also be uncomfortable. So a multitude of factors can actually affect things.
Can you provide some advice on finding the right Buy to Let mortgage?
Just come and have a chat with us. This is an area we pride ourselves on – we do a lot of Buy to Let. We definitely can find you the right deal.
What are the implications of recent tax changes on Buy to Let mortgages?
It’s a difficult one because in theory it could change tomorrow. Every time there’s a new government budget they could change how Buy to Let is taxed.
It used to be that all mortgage interest was tax deductible. In other words, if your mortgage was £1,000 a month (interest only) it was tax deductible, and it didn’t matter if you were a higher rate, basic rate or additional rate taxpayer, all of it could be written off.
It then changed, so that higher rate and additional rate taxpayers no longer get the 40% or 45% off their mortgage payments. I mentioned earlier that higher rate taxpayers and basic rate taxpayers could borrow different amounts on a Buy to Let because their income is taken into account.
You can only claim back a 20% tax credit at the end of the year, and that’s why basic rate taxpayers can generally borrow more on a Buy to Let mortgage than a higher rate taxpayer.
Speak To an Expert
Come on in and be quite forward with what you’re after – just be very honest with your mortgage broker. It’s good to make sure that we know absolutely everything about you. That way we can’t be blindsided by a lender. An open book policy is very good when coming to see your mortgage broker.
Can you explain how remortgaging works for a Buy to Let property?
The key time is when your deal’s coming to an end – when if you do nothing, you will jump onto a lender’s standard variable rate. It’s always worth considering a remortgage when your product is ending.
You can look at other options, such as borrowing more. If the property price has gone up and the rent’s gone up, you might decide to buy another property. We’ve helped many landlords borrow as property prices have risen.
Obviously that doesn’t necessarily always happen, or it can be much slower. But we’ve helped people go from one property over the years to three, four, five or six, just by helping them remortgage, take some money out, buy another property or do up existing properties.
It’s a good thing to have a conversation about when your interest rates are coming to an end and you’re not sure what to do next.
Are there any restrictions on using a Buy to Let mortgage for properties in certain areas or for specific tenant types?
Yes – again that list can be quite long. You might struggle if you’re trying to buy a property in very close proximity to a university, but you’re looking to let it to a standard family. The lender might not necessarily think that’s a great investment.
Similarly, if you’re looking to rent out a house of multiple occupancy for six unrelated people on a residential street. They might feel that doesn’t really make sense. Sometimes high-rise blocks can be a challenge, and you tend to need a more niche lender for that.
In terms of tenant types, most lenders are relatively inclusive. That’s not a major issue, to be honest. In certain areas you might start getting into the realms of houses of multiple occupancy. But a good advisor would point you in the right direction, especially if they know their locality.
What are the potential risks involved in investing in Buy to Let properties?
I touched on one of the major ones. A lot of landlords worry about rental voids. A property could be empty for a certain amount of time, due to market conditions, or because you’ve had to renovate the property after a bad tenant. If a tenant has left it in a poor state of repair, of course the bill is ultimately going to be yours.
Another one of course is property prices. More people are willing to ride out ups and downs in house prices when it’s your home. You’re going to keep paying for it and hope that one day you’ve made some money from it.
But when it’s an investment, you’re really hoping it’s going up in value as well. If house prices dip, you might end up getting back less money than you originally put in, especially if you decide to sell in the short term.
Property is not very liquid – it’s not easy to get your hands on the cash and you’re tying up a lot of capital for the mid to long term. Shorter term, it can be done, but it’s a more expensive way to borrow and of course the risks are even higher.
Can you provide some insights into the current trends and market outlook for Buy to Let properties in the UK?
That’s a difficult one – we have noticed a general slowdown in people buying right now, in November 2023. We did have a huge influx only a couple of years ago, when rates were very low.
A lot of landlords stood to make a very tidy profit on the monthly rent against their monthly mortgage payment – so it completely made sense. Of course, house prices were going up and up, so they were winning twofold. Now, because things have slowed down and rates are higher, those margins are much finer.
People aren’t sure whether they really want to invest in property right now. But in my opinion I think rates could start to stabilise. They already have started to show signs of that. We are seeing more Buy to Let enquiries, even if they’re a bit more tentative.
People are coming in and asking questions about costs and whether their plan is achievable. Hopefully going forward we will see more people getting back into the property market.
Are there any government schemes or support available specifically for Buy to Let investors?
No – the government is more focused on helping people buy their own home, completely understandably. When people own their own home they are in a much better position than renting forever. At the moment everything is pointed in that direction, and I think that’s probably the right way to go.
What’s the importance of property management and how does it impact Buy to Let mortgages?
Looking after your property is major – otherwise a mortgage lender could in theory try and ask for the money back. It’s normally in your mortgage terms and conditions that you have to keep the property in a good state of repair.
Your buildings insurance would also stipulate that – it’s an important factor. So managing your property is very key. If you’ve got a large portfolio, it can affect your ability to borrow if you’ve got properties that aren’t looked after.
I hate to use the term, but you see ‘slum landlords’ mentioned in the media. A mortgage lender will not want to be party to something where a tenant is living in substandard conditions.
So look after your properties and your tenants will do the same. If it looks good and it is a nice place to live, your tenants will look after it, and that looks after you.
What are the consequences of defaulting on a Buy to Let mortgage?
Lenders are less likely to be as forgiving as with residential. If you default on a Buy to Let they’re going to try to become the rent receiver. They might try to collect the rent on your behalf and not give it to you. They’re going to take it to cover their risk and their mortgage payments.
If they put someone in place to collect that rent, and ultimately repossess the property, your credit score would potentially be ruined. You might never be able to buy again and you could struggle to remortgage your own property.
Any default is considered a very bad thing, whether it’s on Buy to Let or residential. The consequences are massive and will affect you for years to come.
How can I add additional properties to an existing Buy to let portfolio?
You can do it in a multitude of ways. Mortgage lenders normally class anything over three as a portfolio. As a portfolio landlord, you will either have a limited company and buy your properties that way, or own them in personal names.
Often people borrow against current properties. So when a rate is up for renewal and you decide to remortgage, you borrow additional funds to go and buy more properties. Within that process you’d have solicitors, a mortgage advisor and obviously lots of other people involved.
What steps should a first time Buy to Let investor take before applying for a mortgage?
Speak to your advisor and get a good handle on the kind of landlord you want to be. I don’t mean good or bad, obviously, because that’s a terrible decision to make! But it helps to be clear about the kind of properties you want to let out and how many you want in future.
A lot of lenders prefer you to start with a standard let property, purely to get some experience of looking after tenants and managing a property etc. As you can imagine, it’s a lot more work to manage a property with five separate tenants – you’ve potentially got five different agreements, with people potentially paying different amounts if the rooms are various sizes.
The first step is to make sure you’ve got a good deposit. Speaking to your advisor is key – we can give you an idea of suitable deals and how much you can potentially borrow on the properties you’re looking at.
Have a chat to some agents locally about whether these properties rent easily. The last thing you want is to get your fingers burned buying a property no one wants to rent. Always ask for guidance if you’re unsure about anything.
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.