Buy to Let

What is a Buy to Let mortgage and how does it differ from a regular mortgage?

A Buy to Let mortgage is a loan you take on a property that you’re purchasing specifically for letting out. There’s not a great deal of difference in terms of structure. You still have your monthly payments and you still pay a deposit to purchase the property.

What’s really different is the affordability, which we will come on to a bit later. There are also different terms and conditions based on the fact that you’re letting the property to a third party.

What are the eligibility criteria for obtaining a Buy to Let mortgage? What factors do lenders typically consider when assessing a Buy to Let mortgage application?

The eligibility criteria are very similar to a standard mortgage, in that you still have to pass an affordability assessment. That assessment is based on the rent that you’re going to receive.

Some lenders will have a minimum income requirement, and the rent you get from the property is measured against a stress-tested interest rate.

How much deposit is usually required for a Buy to Let mortgage?

Your typical minimum deposit is 25%. A few lenders might go a little bit lower, to 20% or even 15%, but that’s quite rare and the criteria are stringent. They’re not seen very often.

So if you are thinking about a Buy to Let investment, my advice would be to consider whether you can put in a 25% deposit for it.

What is rental coverage and how does it affect Buy to Let mortgage applications?

Rental coverage is about calculating the rent required to cover the mortgage based on a stress-tested interest rate. Typically, you may pay around 4%, but the lender may look at whether the rent covers the mortgage based on a rate of 6%.

They’re taking a worst case scenario, to make sure that the mortgage remains affordable. Affordability for lenders is generally the most key thing, after credit score.

Are there any specific fees associated with Buy to Let mortgages that borrowers should be aware of?

Not specific fees as such – you still pay the same things. There might be an arrangement fee associated with the mortgage. There might be a valuation fee, depending on the lender.

Sometimes arrangement fees with Buy to Let mortgages are a little bit higher, reflecting the higher risk of a Buy to Let mortgage. You might also find that your legal costs are a little higher as well. But essentially, the costs are largely the same.

Should I choose interest only or repayment on a Buy to Let mortgage?

Typically, you would consider a repayment mortgage as the best way to go because ultimately the mortgage is being paid off as you go along. The balance will reduce to zero over time.

However, because you’re relying on the rental income to pay that mortgage, some people prefer to have that on an interest only basis.

The rent will then cover the mortgage payments with a bit left over for additional costs – and hopefully a bit of profit for the investor.

But if you’re doing that, you’ve got to remember that interest only doesn’t reduce the balance of that mortgage unless you make additional capital reductions. Whilst it’s more common to do it that way, and certainly the monthly costs are lower, you do need to think very carefully about how you will pay that mortgage off in the future.

That could be from an external investment vehicle, although typically selling the rental property will clear that mortgage – as long as the property value remains higher than the mortgage, plus any costs of selling.

Are there any restrictions on using a Buy to Let mortgage for properties in certain areas, or for specific tenant types?

Yes. Depending on the lender and the circumstances, you may find some lenders are more or less restrictive. I’m not going to go through every single possibility. But I would encourage anybody with unique circumstances to contact us and have a discussion about it.

If you’re renting privately to a single individual on an assured short hold tenancy, the majority of lenders are absolutely fine with that. But if you’re purchasing an HMO – a house in multiple occupation – only a limited number of lenders do that.

Although the rental from a HMO can be potentially higher, because of the number of occupants, it represents a slightly higher risk. Ultimately, that’s going to cost more, and not every lender is happy to lend in those circumstances.

Are there any government schemes or support available specifically for Buy to Let investors?

No. I’m not aware of any specific government schemes that are there to help. However, what we have seen change recently is that more people now look to use limited companies to purchase their Buy to Let properties.

I can’t comment on tax efficiency – ultimately you would need to speak to a tax expert or accountant who specialises in those things to get a clearer idea. But lenders are recognising that people want to use limited companies, and so more options are becoming available.

Before you consider a Buy to Let investment, make sure you speak to a tax expert and understand the best way to get that set up. That will give you the best advantages to make the most profit from your investment.

What are the consequences of defaulting on a Buy to Let mortgage?

They are the same as defaulting on any other kind of mortgage or debt. The account would fall into default once it’s in arrears. If that continues, ultimately the lender would then seek to take ownership of the property, effectively via repossession.

The impact would make it difficult to purchase further properties in the future – not just from an investment perspective, but also from a residential perspective. The default would be recorded on your credit file for at least six years. Plus, there’s a register of repossessions and some lenders don’t like to lend to people that have previously had property repossessed.

What are the potential risks involved in investing in Buy to Let properties?

The first risk is that property values are not guaranteed. We know that investing in bricks and mortar over time has been a provably good investment, but that doesn’t mean it’s going to remain that way in future.

When you’re looking at particular properties, you need to look at their background. If it’s not a new build property, a survey may be needed to flag up any potential issues, repairs or potential big costs on the horizon, because all those things could potentially eat into the profits of your investment.

The second thing is that obviously the mortgage requires payment, regardless of whether you have a tenant in the property. If you have a void period where there’s no rental coming in, it’s not going to absolve you from paying that mortgage.

So when you let a property, keep hold of some profit and try to build up a little bit of a cushion. Then, if you do have any void periods in the rent, you can get through those with minimal fuss.

Can you explain the process of adding additional properties to an existing Buy to Let portfolio?

A portfolio is not something you specifically create. It’s something that simply exists if you own more than one property. Two properties could be considered a portfolio, but you don’t have to declare it as such.

When you buy multiple properties, some lenders might look at the overall rent from that portfolio and the overall Loan to Value. That’s the value of the mortgage loans against the value of the properties. The background of those properties could mean lenders put additional restrictions on your new purchase.

It’s really important to do your research. Talk to us as early in the process as possible and we can help guide you on the best way to add an additional property – and whether your existing properties will cause any unexpected issues. It’s quite rare, but it’s always best to talk it out first.

What steps should a first time Buy to Let investor take before applying for a mortgage?

Do your research. As mortgage advisors, we can’t advise on the suitability of any particular property as an investment. All we can do is we can advise you on the finance and the most appropriate mortgage for the circumstances.

Any first-time investor should really research the specific details and make sure they’ve accepted the risks that go with it. They need to understand what happens in certain circumstances, and that the value of their investments can go up or down. We must never see anything as guaranteed.

How can a mortgage broker help with a Buy to Let mortgage?

Come and talk to us. We’re here to help and try to make things better for you. We’ll give you good, solid answers. You’re not necessarily always going to get the answers you want to hear, but it will be researched, it will be honest and to the best of our ability.

It only makes sense for us if you’re successful. We’re not going to deliberately advise you otherwise. By the same token, the more information we have, the better our advice is going to be, and the better we can help and guide you as you move forward. Not just hopefully as a first-time landlord, but hopefully over time as a multiple investor.

YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

MOST BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.