This is for informational purposes only and is not advice. We recommend you discuss any investment decisions with your financial adviser. Every effort is made to ensure the accuracy of the information but no assurance or warranties are given.
What’s a buy to let mortgage?
Pretty much what it says on the tin. You’ll need to use a buy to let mortgage if you plan to buy a property to rent out. Likewise, if you’re planning to rent out your existing home, you’ll typically need to swap to a buy to let mortgage.
In some cases, for example if you’ve moved jobs, or need to temporarily move away, you may be able to get ‘consent to let’ under your existing residential mortgage arrangement.
Consent to let
In some cases, depending on your circumstances, your lender may allow you to rent out your property under your residential mortgage. Doing this would normally mean you’d be breaching the residential mortgage contract.
If you can’t get consent to let, you’ll have to remortgage to a buy to let product.
What’s different about buy to let mortgages?
Unlike residential mortgages, buy to let mortgages are considered more risky from the lenders perspective and generally require you to:
- put down a bigger deposit – typically at least 25% – though some lenders allow you to get away with 20% (and in rare cases 15%).
- pay a slightly higher interest rate
- pay higher fees to the lender at outset
- in most cases take the loan out on an interest only basis for it to be affordable
- forfeit the financial protection you would normally get as a consumer under a regular residential mortgage
So, how much can I borrow?
Typically the amount you can borrow will be driven by the amount of rental income your new property will produce.
You will usually also need to meet minimum earned income and credit scoring requirements.
You generally need a monthly rental income of at least 1.25x – 1.45x your monthly mortgage repayments assuming an interest rate of about 5.5%.
Don’t forget to factor in tax, landlord insurance, rent insurance and letting agent fees when figuring out what’s affordable.
As part of our advice process at Exley Financial Planning, we’ll help you figure out whether your proposed Buy to Let purchase is affordable.
Is buy to let worthwhile?
We’ve got lots of clients who stand by buy to lets as one of their preferred investment strategies – but they’re not for everyone. You’ll need to commit a lot of time and money to make it work.
There have been some tax changes in recent years, which have made buy to lets slightly less attractive to the inexperienced landlord. In particular, if you buy a second home, you’ll be liable to pay the higher rate of land transaction tax / stamp duty.
Some tax reliefs have also changed. In particular, in relation to mortgage interest payments and wear and tear.
Get in touch for more information about Buy to Let tax changes.
How can I make money out of a buy to let?
There are two main ways you could make money from your buy to let property:
- Rental profits – which could increase as rent rates rise
- Value of your property could increase over time
Of course, you’ll have to have a think about which of these is more important to you, because this will impact the location where you choose to buy. For example, if you’re looking to make money by selling the property in the future or releasing equity, you may avoid looking in places that have recently seen a sharp rise in house prices (what goes up might come back down).
Can I get as many buy to let mortgages as I want?
This will depend on the lender.
Many high street lenders will limit you to 3 or 4 buy to lets. Extra scrutiny is required for ‘portfolio landlords’ – defined as those having 4 or more Buy to Let properties.
However, other lenders will allow you to own upwards of 15 buy to lets in your own name.
Should I set up a Limited Company for my buy to lets?
You should always take advice from an accountant here.
As a general rule of thumb, the more properties you have, the more likely it is that owning them under a limited company will be more efficient. For example, if you only had one property, it’s likely the additional set up and running costs of a LTD company would outweigh the tax benefits.
One of the main advantages of running a property portfolio under a limited company is that you can still deduct mortgage interest payments from your gross profits for tax purposes.
It’s important to note that in general, interest rates are higher for mortgages held under a limited company status.
Interest only buy to let mortgages
An interest only mortgage means you don’t have to repay any of the loan until the end of its term. Instead, you just make interest payments every month.
For example, if you borrowed £100,000 and your annual interest rate was 2%, your annual interest payments would be £2000 (or £166.67 per month).
On the other hand, most residential mortgages require that you pay both interest and some of the loan off each month – making monthly payments more expensive.
You’ll need a plan in place to pay off the loan at the end of your mortgage.
This could be:
- selling the property
- investments
- an endowment
- taking out another mortgage
What evidence do I need to provide to get a buy to let mortgage?
First of all, you’ll need to meet a given lenders criteria. For example, you might need to have a clean credit score, be over the age of 21 and already own your own residential property. Remember, different lenders have different criteria.
Once it’s been established that you meet the criteria, the lender will often ask for the following:
- Proof of income (P60s, payslips covering 3 months, tax returns)
- Proof of deposit and it’s source
- Proof of ID (passport / driving licence)
- Proof of your address (bank statements / utility bills etc)
Where to get a buy to let mortgage?
You can get buy to let mortgages directly through a high street, or other lender.
However, some of the best deals are sometimes only available through mortgage brokers like Exley Financial Planning, who have access to some lenders that you cannot deal with directly.
Going through a broker will also ensure you have access to the expertise required to ensure your purchase is likely to meet your financial objectives over the medium and long term and further to ensure your case is presented in the best way to the most appropriate lender to ensure a speedy and seamless path to completion.
Your property may be repossessed if you don’t keep up repayments on your mortgage, and some buy to let mortgages are not regulated by the Financial Conduct Authority.
