What is a Buy to Let Mortgage (BTL)?
A Buy to Let is considered a good property investment where a landlord purchases a property for the purpose of renting it out. This requires a special type of mortgage which is different form a residential mortgage and is specifically known as a Buy to Let mortgage.
How is a Buy to Let mortgage different from a residential mortgage?
- Well, as a starting point, a Buy to Let mortgage is based on how much rent the property will generate and not on your income. It is the potential profitability of the property that is counted. However, most lenders will still also require that you at least have a minimum amount of income, typically £20,000-£25,000.
- The interest rates are usually higher and can be up to 3% higher than a residential mortgage interest rate. The reasoning behind this is that the lenders consider this type of mortgage as high risk because you are not going to live in the property yourself, but unknown tenants will be living in it.
- The deposit is also higher-the lender will expect at least 15% as a deposit compared to the minimum of 5% in a residential mortgage-this is again due to the risk factor. Lenders will want more upfront as in their eyes it reduces risk and means that you will have a larger stake in the property.
- Arrangement fees are also higher. Some lenders will also insist on charging a % of the amount you are borrowing rather than a flat fee.
- Conveyancing fees can also be higher.
- A BTL Mortgage will make you eligible for a range of tax deductibles including: Mortgage interest payments, rental insurance, property maintenance and letting agent fees.
You must bear in mind that again due to the risk factor lenders can impose other restrictions including but not limited to a minimum age requirement, already being an existing homeowner, a restriction on the number of floors or bedrooms in the property.
Lenders will also want to see that you are able to provide evidence to show that the market rate for your rental income on the property is at least 123% of your mortgage re-payments.
If you decide to move out of your home and rent it out, then you will need to switch to a Buy to Let mortgage. You must inform your lender of your intention and see if they will allow you to switch, as not all lenders will allow you to do so. Or you could re-mortgage with a new lender.
In any case, it is important that you inform your lender if you decide to rent out your property because you cannot stay under the umbrella of a residential mortgage whereby different terms and conditions apply. If you fail to tell them then this will be mortgage fraud and is considered a grave breach of contract.
How does it work?
The Buy to Let mortgage market is competitive and lenders are cautious. You will need to make sure that you have studied and researched every aspect of a potential Buy to Let property before you begin…so that there are no surprises later on. It is a balance between risk and return and there are many questions you need to ask yourself before you start.
You need to think about how to choose a Buy to Let property that will become a good asset for you. Many people prefer to choose a location close to where they currently live so that there is easy access to the property and they can keep an eye on it. However, it may be that a property in an alternative location will be more profitable. You want to choose an area where you know that there will always be a demand to rent in. These are all things you need to consider. You may at this stage wish to instruct a letting agent to discuss your options and it would be advisable at this stage to give your letting agent as much information as possible with regard to location, type of property, type of tenant you want as well as the state of the property.
Also, consider the following:
- Transport links
- Schools in the area
- Is there parking?
- What is the 10 year plan for the area and its surroundings-will any possible future development impact on your property and its potential profitability
- What type of property do tenants in this area look for?
- Are you going to rent it furnished/unfurnished?
- What is the mean rent for the area?
A letting agent will be able to provide you with some general advice regarding the above. You can also approach the Association of Residential Lettings (ARLA) and obtain more information from their website at: www.arla.co.uk
By doing thorough research you will be able to make an informed decision in choosing which property you will ‘Buy to Let.’
Affordability and costs
Think about your budget and all of the extra costs that will be involved. This will include a deposit (higher than a residential mortgage one). There will be surveyor and legal fees. If it is to be let as furnished you will need to supply suitable furniture for the property. Insurance costs. Also you will have to plan ahead as there may be structural repair costs, which are always the responsibility of the Landlord. If there is a problem with a tenant you may have costs to pay in relation to eviction and possession of the property.
There will also be Letting Agent fees-the agents will help you to find tenants, check their references. Many Letting Agents also offer management services whereby they manage the property for you and deal with any issues that may arise on a day to day basis. This will make the whole process hassle free for you. The agent will usually deduct their percentage fee from the rent on a monthly basis and transfer the remainder to your account.
There are also tax considerations. Any rise in the value of a rental property will be liable for capital gains tax minus the annual exempt amount, which will vary from year to year. Rental income will also have to be declared in a self-assessment for income tax.
Getting independent mortgage advice
Once you have done your research and calculated the affordability of going ahead, it is important you speak with an Independent Mortgage Broker. Get in touch with us and we will guide you through the process of obtaining a Buy to Let mortgage on the most favourable terms to suit your circumstances. We have whole of market access, which is a big advantage. We will ensure that the whole process from start to finish will be as smooth as possible.
When applying for a Buy to Let mortgage, it is important that you consider and calculate your potential return. You will need to be certain that your rent will cover the repayments-lenders want to see a potential monthly rental income of at least 125% of the monthly mortgage payments.
Once you are satisfied, we will proceed to arrange and finalise your Buy to Let mortgage.