The Financial Conduct Authority does not regulate some types of commercial or buy to let mortgages.
In the world of mortgages, there are all kinds of avenues a property purchaser can go down. From first time buyers searching for their first home, to people remortgaging an existing home, holiday let properties and even houses of multiple occupation, there are many routes to take.
One of the most frequently encountered and popular mortgage areas that we hear of from customers, is a buy to let mortgage.
A buy to let is an investment property; You can’t personally live in it, it’s there to make money. If you have privately rented at any point in the past, that property you lived in will have most likely had a buy to let mortgage attached to it.
For a property to be classed as a buy to let, it has to be mortgaged as such, with the landlord expressing desire to rent it out to a tenant. The tenant pays a monthly rental amount, that should hopefully cover the monthly mortgage fee for the landlord, plus maybe a little extra.
There are a variety of factors to looks into, in order to determine whether or not you are eligible for a buy to let mortgage.
Some of these include the type of property you’re looking to buy, your age (you have to be at least 21 and you will be limited in mortgage lenders who will let you take a buy to let past 75), as well as any experience you have as a buy to let landlord.
The biggest factors to look at are affordability, the minimum deposit requirements and your credit score.
In order to prove that you are eligible for a buy to let mortgage, you will have to prove your affordability to a mortgage lender. The majority of mortgage lenders will base their criteria on what your projected rental income will be.
Projected rental income is what the mortgage lender believes you need to be charging, in order to cover the costs of your monthly mortgage payments, plus some extra. There will be a set requirement for this, which the mortgage lender will calculate based on the value of the property.
In addition to a projected rental income, some buy to let mortgage lenders will also have a minimum income requirement as well, often £25,000, though this entirely depends on the mortgage lender you are going with.
An expert mortgage broker who is experienced in the world of buy to let mortgages, such as ourselves here at UK Moneyman, will be able to find the most appropriate mortgage lender for what you’re looking to achieve, with the best deal for your investment purchase.
As is the case with any purchase, you will need to put down a deposit. Generally speaking, when it comes to taking out a buy to let mortgage on a property, the minimum deposit it around 20-25% of the properties value, though this can be higher or lower depending on mortgage lender.
The reason for this is to reduce your risk to the mortgage lender. In having a higher deposit, you’re borrowing less against your property. This in turn opens you up to a 75-80% loan to value, which can allow you to access much better rates of interest.
If you are even higher of a risk, say you’re applying for a buy to let mortgage with bad credit, you may be required to put down an even bigger deposit.
You may be able to obtain a buy to let mortgage if you have a poor credit score or a history of bad credit, though you may find yourself with limitations on your choice of mortgage lenders. There are many who won’t lend to someone who has a history of bad credit.
For those mortgage lenders who are willing to accept this, they will want to look at factors such as how serious your bad credit history is and why it is the way it is. Furthermore, you may be required to put down a much larger deposit.
In order to apply for a buy to let mortgage, you’ll first need to find a property that you are looking to purchase.
From there, get in touch with an expert buy to let mortgage advisor, as they will be able to confirm eligibility, scour the market for the best deals, and get your agreement in principle sorted.
Once you have that, you’ll be able to make an offer on the property, which will lead to your full mortgage application process being underway, so long as your offer has been accepted.
Typically speaking, you’ll find that most buy to let investors will take out their mortgage as an interest only mortgage. With an interest only mortgage, you only pay the interest per month, which drastically drops your monthly outgoings.
Once you reach the end of your term, you’ll owe the remaining capital balance, which is covered by either selling the property or remortgaging onto a repayment mortgage. You may have also set up a repayment vehicle that will be able to cover the cost for you.
Whilst this is the most commonly occuring mortgage type and is considered to be more tax-efficient, you are still able to apply for repayment mortgages on buy to let properties. This will see you, much like with most mortgages, paying capital and interest combined per month.
Even though this can mean higher monthly mortgage payments to your mortgage lender, it allows you to grow equity in your property and then when your term is due to end, own your property outright, without any large capital payments to make back.
To learn more about interest only mortgages, feel free to read our article “interest only mortgages explained“.
As touched upon above, a mortgage lender will want to test your projected rental income, to see how much you will need to earn, in order to cover the costs of your monthly mortgage payments.
In terms of how much you can borrow, as long as your projected income is able to cover the amount you are asking for, there will generally be no limits. A mortgage lender may, however, want to see that the projected rental income exceeds the monthly payments by a particular percentage.
In order to apply for a buy to let mortgage, you will also need to provide a mortgage lender with a variety of documents, before you are able to proceed. These can include, proof of your income, deposit, ID, address, any bonuses and commission and your current or most recent P60.
If you are self employed, you will usually also have to provide your SA302 tax returns. Existing landlords may also need to provide proof of rental income, which typically comes in the form of an ARLA-regulated report, as well as a mortgage statement for your existing properties.
Having as much of this to hand as you can, ahead of your buy to let mortgage process, can see your mortgage application moving much quicker than it otherwise would be, so it is definitely in your best interests to be prepared in advance.
Of course with any mortgage, there will be the standard costs involved. You will have to put down a deposit, you may have mortgage arrangement, application and broker fees, there will be monthly payments, and so on, all what you would perhaps expect.
In addition to this though, there may be additional fees that you will have to pay. Some of the more common ones include valuation fees, product fees and mortgage exit fees. On top of this, there may be solicitors fees and disbursement fees and you’ll also have to pay stamp duty.
Your mortgage advisor will be able to more accurately advise on the potential stamp duty rates for you. If you ever make plans to leave your buy to let early, there may also be an early repayment charge (ERC), which can be quite an expensive fee to pay.
Last of all, you’ll have to think about costs that will go on beyond your mortgage process. Landlord insurance will be something you have to factor in, as well as letting agent fees, income tax and then just general property maintenance.
You’re likely going to have tenants from time to time that require something to be looked at. Depending on the works that need to be carried out on your property and the contractors you are working with, this can be either cheap or costly.
All of the costs involved in your buy to let mortgage process will vary, depending on mortgage lender, as well as your personal and financial circumstances. Some of these won’t be factored, though your mortgage advisor will run through all these with you.
Yes, typically speaking you can remortgage a buy to let. Usually we find that the reason a landlord may look to take out a buy to let remortgage, is to release some equity from the property, with a view to put down a deposit on an additional property.
The equity within your buy to let property will differ from a standard residential property, if you are on an interest only mortgage. Normally your balance and the interest would come down together, creating a much larger difference between balance and value.
With an interest only buy to let, only the interest comes down. That means the equity within your home will depend on the size of your deposit and if the home has grown in value over time. On the topic of interest only mortgages, you may decide that you wish to pay the capital balance as well.
You may actually have the option to do this, by remortgaging your interest only buy to let property, switching it to a repayment mortgage, which would give you higher monthly mortgage payments, but allow you to pay off both capital and interest together.
Though your options may be limited, you may actually have the option of obtaining a buy to let mortgage as a first time buyer! When looking at first time buyer buy to let, you will likely need a bigger deposit, in order to access the amount you need to borrow.
Additionally, bear in mind that you will also be losing first time buyer benefits, such as stamp duty, because you won’t be living there and buy to let landlords generally have some level of stamp duty to pay on their properties.
For some first time buyers, becoming a landlord can actually be a good way to supplement your income, before you go on to afford your own mortgage on a home you will be living in.
Please remember that in this instance, a mortgage lender will assess you on your second purchase, with the knowledge that you already have a mortgage in your name. This could affect your affordability or reduce how much you are able to borrow.