Buy to Let Mortgages
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Buy to Let Mortgages
What is a Buy to Let mortgage and how does it differ from a regular mortgage?
A Buy to Let mortgage is secured against a property that is rented out, as opposed to lived in by you. That’s the categorical difference between the two. They are underwritten by the lenders differently.
A Buy to Let mortgage is underwritten primarily on the strength of the rent as well as other criteria in the background. It’s more about the rent the property will receive rather than your own income.
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?
There’s no one size fits all criteria to obtain a Buy to Let mortgage. Each lender has their own criteria and no two are quite the same. What one lender may not consider at all might be the exact kind of business another will look for.
If you’re a First Time Buyer and a First Time Landlord, there are options out there for you – but they’ll be limited. Once you’ve got your first property and a couple of years’ landlord experience under your belt, that’s when the floodgates open – the overwhelming majority of the market will then consider you.
They’ll also look at the type of property. As a first time landlord looking to buy a House of Multiple Occupancy (HMO), you can count the available lenders on one hand. A lot of them focus on how much landlord experience you have and how many properties you own.
A portfolio landlord is defined as someone with four or more mortgaged Buy to Let properties. Things change a bit here, as lenders generally have to check the stability of the whole portfolio as opposed to the individual property.
So the criteria is very wide ranging. But given the volume of lenders in the market, nine times out of 10 there will be at least one out there who will consider your circumstances.
How much deposit is usually required for a Buy to Let mortgage?
That’s an interesting one – how much deposit is required is different from how much I would recommend. A large number of lenders will consider a Buy to Let mortgage with a 20% deposit – and a handful even as low as 15%. But realistically, especially with interest rates as they are at the moment, to have a semi-decent profit margin and a semi-decent mortgage rate, you should look at putting down at least about 25%. [podcast recorded in March 2024]
While it’s possible to get a mortgage with as little as 15% depending on your circumstances and criteria, realistically you should aim for 25% to get your money’s worth.
Can you explain the concept of rental coverage and how it affects Buy to Let mortgage applications?
Rental coverage is a mathematical calculation that lenders do to stress test the mortgage based on the rental income.
They assume a certain interest rate, normally around 8% or 9% – it varies between lenders. They then calculate what the interest only monthly payment would be at that interest rate. The rent from the property has to exceed that by a certain percentage – normally between 125% to 145% depending on the lender. That’s also influenced by whether or not you’re a higher rate taxpayer, or whether you’re buying the property through a limited company.
For example; a £160,000 interest only mortgage at 8% would have a monthly payment of £1,066.67. Assuming the lender does their stress testing at 125%, then £1,066.67 x 125% = £1,333.34. The rent achieved by the property would need to be equal to, or greater than, this figure for affordability to pass.
An interesting aspect is that on longer term fixed rates like a five year deal, lenders don’t do the stress test at that higher rate. They normally stress test it at the rate that you will be paying. The rent has to exceed the mortgage payment at that realistic rate by 125% or 145% – whatever the lender stipulates.
Because of that, you can generally borrow a bit more on a five-year fixed rate. That’s a generalisation, as every lender has their own individual way of doing it, but it gives you an idea.
Are there any specific fees associated with Buy to Let mortgages to be aware of?
Product fees tend to operate a little bit differently from a standard residential mortgage. Very often – but not always – the Buy to Let product fee is a percentage of the loan rather than a fixed amount.
As of now, in March 2024, given how high interest rates are, Buy to Let is not as attractive to a lot of landlords and property investors as it used to be. So lenders are offering very low rates – sometimes lower than they can feasibly afford to offer – and offsetting that with sizable product fees.
I’ve seen fees as high as 10% product fees with some lenders. That’s catching a lot of people out. They’re drawn in by a very attractive interest rate, but there could be a five figure product fee associated with that.
When I source Buy to Let deals, I look for a happy medium between the two. It’s probably not going to be the lowest rate on the market but not the highest either. It’s whatever is most suitable for the individual applicant and their needs and preferences at the time.
Should I choose interest only or repayment on a Buy to Let mortgage?
There’s no right or wrong answer. It depends on people’s needs and preferences. This is not to be constituted as advice, but the question I would consider is whether you want to make money on the property now, or have it as your pension later in life?
If a client tells me they want to make money on it now, the interest only option can make sense. The monthly payments are generally lower than on repayment, so the profit margin will be greater.
If, however, they’re not overly concerned about making money month on month now, but they want to have a good income in their retirement, that’s when we would potentially consider capital repayment. By the time they do get to retirement age, their mortgage will hopefully be paid off – so they’ll be getting the rent from the property with no mortgage payment coming out of that. Their retirement income would be supplemented quite significantly.
What are the implications of recent tax changes on Buy to Let mortgages?
There’s only so much that I can say on that subject because I’m not a qualified tax advisor. I’m relatively knowledgeable with how it works, but I can’t cross that invisible line of giving advice on tax.
Generally speaking, if you owned a Buy to Let property in your personal name, you used to be able to offset some or all of the interest on your mortgage against your tax bill. You could effectively get tax relief from it. Since the tax changes, you can’t do that anymore.
There may be some kind of creative ways around it, but you’d need to seek advice from people who are more knowledgeable about tax than I am. An accountant or a tax advisor is the best source of advice.
SPEAK TO AN EXPERT
Are there any restrictions on using a Buy to Let mortgage for properties in certain areas or for specific tenant types?
Yes, although it’s normally more specific to the lender or the product.
For example, if you’re looking at a standard Buy to Let property for a single tenancy agreement with a family unit, you couldn’t then suddenly decide to let the property out on a room-by-room basis or as a holiday let.
You would have to get the lender’s permission first, because they’re underwritten differently. With holiday lets for example, such as a property you put on Airbnb or a similar platform, only certain lenders allow that.
It’s the same with HMOs and things like that. Also, very few lenders will consider what’s called corporate letting, where the property is let out to a third party on a long-term lease. These leases are normally several years long, where that company provides accommodation for another purpose.
It largely depends on who the kind of tenants are going to be. If it’s going to be let out via a charity, or the NHS, or where the tenants could be considered “vulnerable”, the lender will be more reluctant – as it would be bad press for the lender if they ever had to repossess the property and evict the tenants.
There are lenders who’ll do it, but only a handful. Tenant type is a very specific one. It’s important to establish who the property will be let to before you start going down the mortgage route. It will have a big impact on which lenders we should consider.
Are there any government schemes or support available specifically for Buy to Let investors?
For the investment side of things, no, not that I’m aware of. But I do know that properties now have to have a certain energy efficiency (EPC) rating before they can be considered lettable. Many landlords on my books have had concerns about this.
It varies around the country and between local authorities, but you may be able to get a government or council grant to help improve the property’s EPC rating.
How important is property management for Buy to Let mortgages?
This is something of particular importance to newer landlords, and the approach varies between lenders. With some lenders, if you’re a first time landlord they like you to have a letting agent in place. They aren’t a fan of self-managed properties unless you’ve got landlord experience, especially if one of those properties is going to be a HMO.
Some lenders will also factor in management costs. So with the calculation I explained earlier on, some lenders will take an additional haircut off that based on the management cost. They calculate the mortgage borrowing after those costs, which can make a difference.
It also depends on your proximity to the property. If you live in London, for example, and you’ve bought a Buy to Let property in Manchester, most lenders would expect that to be managed by a local letting agent – unless you have another plausible way to manage that property remotely.
What are the consequences of defaulting on a Buy to Let mortgage? What are the potential risks involved in investing in Buy to Let properties?
The consequences of defaulting on a Buy to Let are largely the same as on a residential. It will have a detrimental impact on your credit history, which can be massive. It could also lead to additional costs and actions from the lender – which in the worst case scenario could potentially mean repossession.
In terms of the potential risks, a big misconception for new landlords is that this will just be a nice little money printer in the background. They think it’s as simple as they will get the property, let it out and receive extra money in their bank account each month.
You need to consider that you’re responsible for all the property maintenance – literally anything that goes wrong in the property. There are also background costs that people don’t think of: things like gas safety, electrical safety and fire safety certificates. There’s a legal requirement to check those annually, creating costs that need to be factored in.
Also, there are always risks around tenants. We’ve all heard stories of damage done to properties by malicious or bad tenants. You also need to consider what happens if there’s a rental void. It links back to the interest only or repayment decision we mentioned earlier on.
If there are a couple of months where you don’t have a tenant in the property, could you cover the mortgage and the council tax and everything yourselves? As advisors, we apply extra due diligence there – even if a Buy to Let mortgage is underwritten based on the rent, we need to make sure you can manage financially if there is no tenant.
In the event of a rental void, the landlord is responsible for the utilities standing charges, council tax and mortgage. We make sure you’ve got a safety net or enough income to cover those gaps.
How do landlords add additional properties to an existing Buy to Let portfolio?
Generally, you find a property to buy and go through the mortgage application in the same way. You become a portfolio landlord once you have four or more mortgaged Buy to Let properties. If you’ve got six properties but only one of them is mortgaged for example, you’re not seen as a portfolio landlord by lenders.
Once you hit that threshold of four mortgaged properties, most lenders do a stress test on the whole portfolio. The more properties you have, the more chance there is of a rental void – so lenders have to make sure that the portfolio as a whole is quite resilient.
The approach varies between providers, but with that 125% or 145% cover at a specified interest rate, they run those numbers across the whole portfolio as well as the individual property. They look at all the rent and all the loan amounts. There’s a pass/fail benchmark, so if you’ve got a particularly low yielding portfolio, as it grows you may struggle to find suitable finance.
As your portfolio gets very large, some lenders set a maximum number, typically 10 or 12 properties. Meanwhile some have no maximum number at all. Some will only allow a value of properties. The maximum amount of borrowing might be £X million, regardless of how many properties that is.
Exact criteria vary wildly between lenders, but some providers are specifically geared up for large-scale landlords. Some have no maximum property number or value.
What steps should a first time Buy to Let investor take before applying for a mortgage?
I advise every first time landlord to speak to someone for tax advice. You can own a property in your personal name or in your limited company name. The tax treatment of the rental income is different between the two. Your profit and how much tax you pay can vary significantly depending on which option you go for.
I always recommend speaking to an accountant, tax advisor or any kind of suitably qualified professional. They can advise you on whether or not to do it in your personal name or through a limited company. If you do it in one name and then decide to move the property into the other, additional rate stamp duty may be payable again – you potentially pay additional rate stamp duty twice on the same property.
There may potentially be loopholes to mitigate that, but that’s a tax adviser question. So seek advice.
How can a mortgage broker help with Buy to Let mortgages?
I work with a lot of Buy to Let lenders, especially for properties that might potentially be outside of the high street – HMO properties, for example, or unusual properties like corporate lets.
Once you get into the more specialist areas and as your portfolio grows, a lot of the high street lenders start getting filtered out, because of their criteria. That’s when we go to the specialist lender market. Most of those are broker only, so you won’t be able to approach them yourselves. You’ve probably never even heard of them – they don’t market themselves publicly.
If the high street can’t help you, chances are there will be a suitable deal out there for you. We will have worked with that lender before with other clients. In a nutshell, we bring knowledge and experience that a Google search can’t give you. That’s where we shine.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
SOME BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.
