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Buy to Let Mortgages
Exploring Buy to Let mortgages and how to become a landlord with Michelle Strelley.
What is a Buy to Let mortgage and how does it differ from a regular mortgage?
A Buy to Let mortgage is a mortgage for a situation where you have a property and you rent it out to a tenant. It could be that you’ve inherited a home, or you’ve moved in with your partner and decided to rent out your previous house instead of selling. Or, you might buy a property specifically for the purpose of making money from rent.
What are the eligibility criteria for obtaining a Buy to Let mortgage?
It can vary from lender to lender. Some like you to be a residential homeowner already, but not all of them. Some like you to have a minimum income as well as the rental income Others like you to have landlord experience – so it can really vary. It’s always worth speaking to a broker on that one.
How much deposit is usually required for a Buy to Let mortgage?
It’s usually 25% of the property value. We do have some exceptions to that, where they’ll take a little bit less, but it’s usually 25%.
Choose interest only or repayment on a Buy to Let mortgage?
It depends what you want to do with the property and your goals and aims for the future.
For example, interest only might suit somebody who wants to benefit as much as they can from the income now, with a plan to sell the property in the future. Repayment might work for somebody who’s renting a property out now but wants it for their children in a few years’ time. It’s individual to a person’s situation.
Are there any specific fees associated with Buy to Let mortgages that borrowers should be aware of?
Lenders tend to have higher product fees for Buy to Let mortgage – at the moment anyway [podcast recorded in October 2023].
Stamp duty is at a higher rate in England. You will also have solicitors’ costs, and as a landlord you will have to pay for the upkeep and maintenance of the property. You might decide to pay an agency to manage the rent and tenants for you. So yes, there are a couple of extra charges to think about there.
What factors do lenders typically consider when assessing a Buy to Let mortgage application?
The rental income for the property plays a massive factor. With a Buy to Let they not only value the property itself, but they also value the rental income to see if it is actually suitable for the property, to make sure that it all makes financial sense.
How can I find the right Buy to Let mortgage deals?
Definitely speak to a broker. There are so many out there and it all comes down to an individual’s circumstances. I would always suggest you speak to a broker.
How does remortgaging a Buy to Let property work? When might it be advantageous?
It might be that you are coming to the end of a fixed rate or you want to borrow more by releasing equity out of your Buy to Let. You could remortgage to release money to buy another property.
Are there any restrictions on using a Buy to Let mortgage for properties in certain areas or for specific tenant types?
Lenders are okay with most areas. Some lenders exclude Scotland or Wales, however, and some Scottish lenders exclude southern England.
Some lenders won’t lend to portfolio landlords or on student lets and Houses of Multiple Occupants (HMOs) – in these cases we would shift towards more specialist lenders. A broker or a financial advisor will definitely be needed there.
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What are the potential risks involved in investing in Buy to Let properties?
There are a couple of risks. One is liquidity risk – by that I mean it can be tricky to get the cash from it quickly. If you wanted to sell the property and get the lump sum, it will depend on how the property market is going.
Even a quick sale can take six to eight weeks, which isn’t exactly fast to get a lump sum of money. Also, there’s no guarantee of a property’s value in the future. We’ve had a trend where property values have been increasing slowly for years and years, but will that go on forever?
If your rental property is your future – it’s essentially your pension fund – that can give you lack of diversity. If the property market crashes, the risk is that you lose all of your investment.
How important is property management with Buy to Let mortgages?
It’s very important. Make sure the property is kept up to a good standard, because although you’re not living in it, you want your tenants to be happy. I’ve had clients who’ve had tenants for years and years because they’ve looked after them and the property.
It may be a good idea to get a letting agent involved. That protects you and protects the tenant as well, in terms of maintenance of the property.
When you come to remortgage, if the property’s not been kept in a good condition that might affect its value. In turn, that might affect your remortgage ability. If the end goal is to get a lump sum when you sell it, you want it to be in good condition to get as much as you can for it.
What are the consequences of defaulting on a Buy to Let mortgage?
Ultimately, it will lead to repossession, defaults on your credit file and not being able to borrow in future. You might then not be able to maintain an investment Buy to Let portfolio if that’s your aim. If you’re struggling, speak to the lender.
Can you explain the process of adding additional properties to an existing Buy to Let portfolio?
I would always advise somebody to seek advice if they want to become a portfolio landlord, particularly if this is an income source or a future investment source. Speak to an accountant or a tax specialist as well as a financial adviser, to make sure it is definitely the right thing to do for you.
Some lenders won’t lend to portfolio landlords once you have over a certain number of properties. There are also behind-the-scenes stress ratings and rental coverage ratios which lenders use to work out affordability. Speak to us to make sure it’s going to fit.
What steps should a first time Buy to Let investor take before applying for a mortgage?
Seek financial advice if you’re investing in Buy to Let. Make sure that’s the right thing to do. You will need to consider whether to buy property in your own name or as a limited company.
You should also seek information from estate agents about rental income in the area where you want to buy – it’s important to make sure it’s definitely a worthwhile investment.
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.
Approved by The Openwork Partnership on 10/11/2023.
