Buy to Let
Matt Hunt from Assured FG joins us on the next episode of the Mortgage & Protection podcast to talk all about Buy to Let Mortgages.
What is a Buy to Let mortgage and how do they work?
A Buy to Let mortgage is a mortgage that’s designed specifically for purchasing a property that you intend to rent out to tenants. They work exactly the same as a traditional residential mortgage would, in the sense that you borrow a specific amount over a set term.
However, the vast majority of Buy to Let mortgages are on an Interest-only basis, rather than repayment, meaning you only pay the interest each month, rather than the capital alongside it.
Who can get a Buy to Let mortgage?
Pretty much anyone, it’s quite lender specific. Some lenders are happy with pretty much anyone, within reason, however, some do have minimum criteria requirements. For example, some require you to be twenty-one or even twenty-five, and some require that you’re an existing homeowner. Some lenders may have a minimum income requirement, to cover any rental void periods. It just comes down to individual circumstances and looking at each individual lender.
How much can you borrow on a Buy to Let mortgage and what deposit do you need?
Lending on a Buy to Let is assessed very differently to a residential mortgage. When you buy on property for yourself, lenders will assess your personal income and expenditure and base the overall lending on those figures.
With a Buy to Let, as it’s a commercial proposition, the lending figure is primarily based around what rental income can be achieved from the property. The rent needs to cover the mortgage repayments and the lender’s individual stress testing in order for them to be happy lending.
If the rent is not quite enough to meet the figure set out by the lender, there are a few options that you can look at. Some lenders will allow ‘top slicing’ which is where the applicant’s own personal income is taken into consideration to top up the required amount. A hidden industry tip is looking at a five-year Fixed-rate deal, which reduces the rent required, as the lender’s internal stress testing rates aren’t set as high as when they’re on a two-year deal.
Deposit-wise, ideally, you’d want 25% or more. There are a range of lenders that will accept 20% and a couple that will even take 15%, but as with residential mortgages, the better rates typically become available with a higher deposit as there’s less risk to the lender.
How much does a Buy to Let property cost?
There’s no extra surcharge for buying a property that you intend to let out. Some properties will understandably be suited better to landlord portfolios than others, but there aren’t specifically Buy to Let properties and costs associated.
If you already own a property, there is an additional rate of Stamp Duty, and that’s a 3% surcharge on top of whatever stamp duty bracket the property falls into. The rates tend to be higher than they would be on residential mortgages, because it’s more for a commercial business proposition, rather than you living in your own property.
The arrangement fees tend to be a bit higher than residential mortgage fees, and these are usually in the region of £2000, or a percentage of the overall mortgage amount. Some Mortgage Lenders will still offer free valuations, like they do with residential mortgages. But a lot of them tend to actually charge the valuation fee for the surveyor to go out and value the property and make sure that it’s suitable to lend on.
Of course, you have all the other costs associated with purchasing a property, such as Solicitor’s fees, broker’s fees, insurance etc.
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Is it illegal to rent out a house without a Buy to Let mortgage and is it illegal to live in your own Buy to Let property?
It’s not illegal, as such, but it does breach the conditions of a residential mortgage. The lender is well within their rights to ask you to completely repay the mortgage if you are caught renting out your house on a residential mortgage, rather than on a Buy to Let mortgage.
If you’ve been living in a property and now want to rent it out, there are a couple of options. You can ask your existing lender for Consent to Let. Not all lenders will agree to this, and it is more for a short-term, giving you the time that you need to switch to a Buy to Let mortgage. If you’re living in the property but want to move to a new property and retain the property to rent out, you can switch to a Let to Buy mortgage, which is essentially where you let your home to buy a new one.
It’s not illegal, but the conditions of the mortgage are that you’re using a Buy to Let mortgage to rent the property out, not to live in as your residential home, so again, this would be breaching the conditions of the mortgage.
Should I choose Interest-only or Repayment on a Buy to Let mortgage?
This really comes down to individual goals and the investment strategy. Some investors want to maximise their monthly cash flow, so they’ll use Interest-only, as the repayments are much less due to the fact that they’re not repaying the capital. The majority of Buy to Let mortgages are on an Interest-only basis. It’s a good way to make an additional income and help grow your portfolio, as the surplus can be put towards the next deposit and you can repeat this process over and over again.
Some investors like the flexibility with Interest-only, as it allows them to overpay the mortgage with these additional funds, but typically, at least 90% of the Buy to Let mortgages I do are on an Interest-only basis.
Some people want to take a long-term strategy and they’re not overly concerned with earning an additional monthly income or repaying that back into the property. They’d rather just have the rent cover the mortgage, and over the term of the mortgage, then eventually own the property outright and have all the capital available within the property for their investment purpose.
How many Buy to Let properties can I own?
As many as you can afford. Lenders do restrict how many mortgages you can have with them or the amount of overall lending that they will allow within the banking group. However, there are hundreds and hundreds of lenders, so it would take a good time to get through all of the lenders caps. I know of a landlord with over one hundred and thirty properties, and he’s still going.
How many properties do you have to own to become a professional portfolio Landlord?
Typically, most lenders consider four properties to be a portfolio, some will say ten. Some lenders apply different stress testing rates to a portfolio landlord. Once you start to build up a portfolio, it’s definitely worth using a broker, as each individual lender is going to look at you differently.
If you’re looking to get into property investment or grow your property portfolio, build relationships and partner with other professionals and trades. A few of the main ones to have on your side are a good mortgage broker who knows the Buy to Let market, because having the right mortgage for your circumstances could save you thousands. A good accountant is also going to be able to legally minimise the amount of tax that you can pay, potentially saving you tens of thousands over the course of your investment.
Getting a solicitor on board, and a letting agent, or property management company can also be helpful, as can all the trades, if you’re purchasing a property and renovating it. Scaling up your portfolio can help you charge higher rents. Property investment isn’t a one-man band, but if you’ve got a good team around you, it’s a lot easier to become a lot more successful.
The Financial Conduct Authority does not regulate some Buy to Let Mortgages.
Your home may be repossessed if you do not keep up repayments on a mortgage or other debt secured on it.