Buy to Let

• Buy to Let Re-mortgage
• Buy to Let Mortgages with Impaired Credit
• HMO Mortgages
• Portfolio Landlord Mortgages
• First Time Landlord Buy to Let Mortgages
• Limited Company Buy to Let Mortgages
• Holiday Let Mortgages
• Interest Only Buy to Let Mortgages

In short, a Buy to Let Mortgage is a mortgage that is secured on a property that has or is being purchased for the sole reason of being let out to tenants. Over the years the popularity of Buy to Let Mortgages has increased. Whereas, in the past owning a Buy to Let Property was seemingly reserved for those that were professional landlords, nowadays you can find landlords that come from all walks of life and quite varying professions.

Set up costs and product rates are different to a standard Residential Mortgage, as is the criteria on which a lender assesses an application. It is usually based on your personal circumstances and also what a lender will deem as the open market rent that may be achieved from renting the property.

Matching all the criteria and securing the right Buy to Let Mortgage can be quite time consuming and complicated, get in touch with one of our specialist advisers to see how they can help.

Buy to Let Mortgages are normally available to people who already own a residential property or live in their own home, either with a mortgage or totally unencumbered.

However, there is an increasing number of people who either live with friends/family or rent themselves and have in fact bought property to rent out, in order to maintain a place on the property ladder. There are a number of lenders who are happy to do business with applicants who “own” property rather than “own/occupy”. You will need to provide full details of your current investment portfolio together with rental and income evidence.

It may be more difficult to get a Buy to Let Mortgage as a First Time Buyer but it is by no means impossible. A lender would normally expect you to be able to afford the loan on a residential basis.

As well as borrowing money in your personal name, mortgages are available to Limited Companies that are specifically created for the purpose of owning and renting property. These “Limited Company” Buy to Let products may be suitable for some borrowers more than others depending on individual tax status and investment objectives. It is very important that you understand the main differences. Good advice from a suitably qualified accountant or tax specialist will help with this decision.

Building Societies and Banks have defined eligibility requirements for this type of mortgage and although they may vary greatly from lender to lender, there are several key areas that tend to be taken into consideration;

 

The Anticipated Rental Income

The amount available to borrow is normally linked to the rental yield, rather than a traditional affordability calculator used for a Residential Mortgage.

Lenders tend to have individual approaches to the calculation of borrowing based on a specific rent and will factor into the decision the income tax status of the borrower and also the period of any fixed mortgage rate.

The exact calculation will be determined by the individual lender but as a guide, the rental income would usually be expected to be equally to 125% of the mortgage interest, based on a notional calculation rate of 5%. This provides an element of safety for the lender in the event of potential future rate increases.

 

Income Tax Status

The need for earned income is not always essential and some lenders will consider an application even if your income is solely from rent. This is not the case with every lender, many of which will expect you to evidence a minimum income, typically £25,000 or more. 

 

The Amount of Deposit of Equity

Subject to the rental income being sufficient based on the lender calculator, the maximum mortgage amount will be between 75% and 85% of the value of the property.

A 25% deposit is the most common requirement in the current market.

Other Rental Properties

If you have a number of rental properties, you may consider a “Portfolio Landlord”. This will be taken into account when considering overall lending risk.

By talking to one of our specialists, you will be able to establish what you can achieve and we can guide you through the various steps of the application process.

A Buy to Let Mortgage is generally available on a wide range of property types, although there will always be a number of styles of accommodation that need a specialist approach or indeed will not be suitable.

Leasehold properties are perfectly acceptable subject to the terms of the lease. Normally, any remaining term on a lease would need to be at least 70 years. A shorter term will affect the term of the mortgage and potentially the current value of the property. In the event that the lease is not suitable because of the term, a new or extended lease may be negotiated with the current owner and the Landlord.

As with a Residential Mortgage, mobile homes and houseboats tend to be excluded by lenders as suitable security.

Certain types of property may need consideration by a speciality or niche lender.

For example;

• Studio Flats with a very limited living space.
• Ex Local Authority Flats in larger blocks and/or with deck access.
• Flats above certain types of commercial property, typically fast food outlets.

A lender may also take into account any other property you have in the same street/postcode area in order to limit their risk and exposure to that area.

As each lender will have a different approach to certain types of property, contact us to discuss your specific situation and we will guide you through the process. By doing this, you are more likely to avoid the disappointment of being declined by several lenders before the correct solution is achieved.

You cannot use the Help to Buy scheme towards the purchase of a 2nd or Investment property.

The Government Help to Buy Scheme is in place to help people get on to the property ladder or move up the property ladder.

Any property purchased with the assistance of Help to Buy must be occupied by the borrower.

There are several types of costs related to mortgages such as;

• Arrangement/Completion Fees
• Set up and valuation fees
• Interest Rates.

Compared to a straightforward mortgage for an owner-occupied property, you can expect a Buy to Let Mortgage to be more expensive on a like for like, loan to value basis.

Interest Rates are set by lenders taking into account the commercial proposition and greater risk. While there is not a vast difference, the Buy to Let Rate will be higher. Lender completion fees vary greatly and could be up to 3% of the loan in some cases.

The majority of borrowers arrange their Buy to Let Mortgages on an Interest Only basis, for a combination reasons, including tax efficiency and for budget purposes to ensure that there is a regular net income surplus each month in order to account for unexpected costs, such as repairs and possibly void periods when the property is vacant and costs are ongoing. On this basis, the loan Capital remains constant and does now reduce over time, thereby reducing the interest charge. The result of this is that over the term of the mortgage, more interest is payable in total.  This may be suited to the tax position of many borrowers but the correct advice from a suitably qualified person should be taken to make sure that the mortgage set up matches your individual circumstances and objectives.

Investors purchase Buy to Let properties typically for the reason of income from the rental return and/or capital gain through the hopeful increase in the property value. For many Buy to Let Owners the returns justify the risks, however, before purchasing any property as an investment you must ensure that you have taken into consideration, the costs of the property ownership.

One of the ongoing costs is any income tax liability. Remember, you are receiving an income in the form of the rent, and as such, this is subject to tax.  Much has changed of late and continues to do so in regard to how this tax is calculated, and in turn this has seen a surge in the popularity of limited company Buy to Lets. However, if in any doubt speak to a tax specialist or an accountant to ensure you are aware of how this affects you.

Another tax to consider is capital gains.  You may have to pay tax on any profit or gain you make when you sell the property.  As mentioned above, tax can be a complicated matter for many however, ignorance is not an excuse and therefore do ensure you are getting professional tax advice for your own individual circumstances.

As a landlord you will have a legal responsibility to your tenant(s). A duty to ensure the property remains legally habitable comes at a cost so therefore do ensure you make allowances within your budget to ensure you have adequate funds for any essential property maintenance.  Remember this expense can come at a moment’s notice especially for circumstances such as a broken boiler that needs immediate attention. Different legislation and rules will also apply for Houses of Multiple Occupation (HMOs) that will likely come with their additional costs so again if in any doubt ensure you do your research first. How you decide to manage your property will also determine ongoing costs.  If you decide to use an agent to deal with the day to day activities on your behalf then expect to pay a percentage of your rental income to them to cover this cost.  This is typically between 10-15%.  You may also have administration fees to pay in regard to arranging new tenants.  If considering this route speak to your local letting agents and ask to see a copy of their landlord agreement.  The other option is to manage to property yourself.  Albeit this will look to keep your costs down to ensure you are willing and able to deal with your tenants demands and enquiries during their tenancy.

If looking to purchase your Buy to Let via a limited company do now remember that although this may have a benefit in regard to your personal tax liabilities, the limited company will still be subject to any corporation tax on profits.  There will be an initial cost to register the company with Companies House and you will also require the ongoing services of an accountant to compile and file your company accounts.

There will also be cost for your initial purchase.  These are likely to be, but not limited to:

• Solicitors fees
• Mortgage arrangement fee
• Property survey
• Stamp duty – this will likely be inclusive of the higher second property surcharge
• Mortgage broker fees where applicable
• Decorative costs/improvements – these may be a necessity to ensure you comply with the Minimum Energy Efficiency Standards (MEES) introduced in April 2018 and can also be an ongoing cost for you to ensure these standards are maintained.

One of the biggest ongoing costs for many is of course the mortgage.  Having a mortgage is a necessity for many Buy to Let Investors and the cost of this must be factored into your budget.  This will for many be factored in automatically when looking at the self-sufficiency of the property however do also ensure you consider the cost of this commitment during times of rental voids.

One of the most common questions asked when someone is considering a Buy to Let Property purchase is how much deposit is needed.  The simple answer to that question at the time of writing is 15% however, regrettably things are not quite that straight forward.

Although there are indeed some lenders that will consider a Buy to Let with a 15% deposit these are very limited the criteria to obtain this will be extremely stringent.  As such when asked, it is advised that the general rule is a higher minimum of 25%, but in many circumstances, this may need to be larger still.

When assessing how much you are able to borrow for a Buy to Let Mortgage the most critical element to a lender is the rentable value.  In most instances this will override any minimum deposit requirement.  For example, should you be buying a property for £250,000 and a lender has the criteria of a minimum 25% deposit this would equate to £62,500 leaving a mortgage required of £187,500. However, if the rentable value of the property meant that the lender would only provide a mortgage up to £162,500 this is the dominating calculation meaning this overrides the minimum deposit requirement, resulting in you now needing to put down a 35% deposit to proceed.  Some lenders now consider looking at overall affordability where other income such as salary can be factored into the Buy to Let Calculation and can be used to cover any shortfall the rent may give in regard to the loan amount.  This is commonly referred to as “top slicing”.

For many Buy to Let Investors a mortgage is a necessity and as such is a cost that needs to be factored into the budget.  The amount of the monthly payment is therefore a critical part in determining the overall surplus income the property provides and ensuring you have the most appropriate mortgage product for your individual needs is therefore extremely important.  For many Buy to Let Mortgages the product, whether this be a fixed or variable rate, will have an end date when at which time the loan will revert to the lenders standard variable rate.  As the lenders standard rate is likely to be higher than the rate that is to finish, many Buy to Let Mortgage customers will look to secure another scheme most appropriate to their needs in readiness for when this is to happen.

The process many borrowers adopt when looking at a new rate is to look at other lenders and consider a re-mortgage, i.e. change from one lender to another.  Whilst this is an option that must be considered, here at Secure Finance Ltd we not only do this when looking at the new scheme but, we will also consider what your current lender may be able to offer you as an existing customer via a product transfer.  We will then recommend what is best suited to your borrowing needs.  The overall cost is the main factor but other possible benefits of us recommending you remain with your current provider may be:

• No additional underwriting
• No recalculations of loan amount permitted based on rentable income
• No property valuation required (unless it is to your advantage to do so and the lender offers this facility)
• No solicitors required
• Reduced paperwork for you

Numerous calculators are available to assist you in your potential borrowing needs; from working out the monthly payment for a specific loan amount, to giving you the information about how much your stamp duty will be based on the purchase price.  All give great assistance in providing you the information you may need but special mention is reserved for those calculators that assist any buy to let investors.

One of the determining factors when lenders calculate how much you can borrow, is the rentable value of the property in question.  Although there is no standard calculation that applies throughout the market as a whole, with each lender having their own individual way of making their calculations, a Buy to Let Calculator can be invaluable to giving you an indication of how much you may be able to borrow against the amount of rent a property can command.  This can also then enable you to ascertain how much deposit you will actually need if you are looking to purchase an investment property.

Buy to Let Mortgages can be a very complex area which do require specialist mortgage advice. Buy to Let lenders have varying criteria as to how much they will lend whether it be different stress testing, age related, the maximum number of properties that can be held by an individual or Ltd company. These are a few of the factors that have to be taken into account when choosing a Buy to Let lender for our clients. It is most important not to apply to too many lenders as this can affect your credit rating, this is where a mortgage broker who understands the Buy to Let market can assist in order to reduce the chances of this happening.

Here at Secure Finance Ltd, we have the specialists who can assist you, let us do the hard work for you!