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Buy to Let Mortgages
A Buy to Let Mortgage is a mortgage taken out on a property that is rented out to tenants for investment purposes. This type of mortgage is typically on an Interest Only term. This means that the monthly payments only pay off the interest charges and not the original capital.
It is illegal to rent out your home if you have a standard residential mortgage without getting consent from your lender.
The affordability for a BTL mortgage is assessed differently to that of a residential mortgage. The lender simply wants to ensure that the rental income will pay the monthly mortgage payments, allowing a little wiggle room for potential rental voids.
How much deposit will I need for a Buy To Let Mortgage?
Lenders typically require 25% deposit for a BTL Mortgage, which is much higher than that required for a standard residential mortgage. This is due to the fact that investments properties are viewed as higher risk by the lenders.
Some products are available whereby you only need a 20% deposit but whether or not you are eligible depends on your circumstances. These products are typically reserved for experienced landlords only.
How much can I borrow for a Buy To Let?
The amount you can borrow is largely determined by the property you are buying where a Buy to Let Mortgage is concerned.
Firstly, the amount you can borrow depends on the value of the property and the amount you have available for a deposit. Although some lenders may allow you to proceed with only 20%, the vast majority of lenders require at least 25%.
Secondly, the amount you can borrow will be determined by the projected rental income. Lenders want to ensure that your monthly mortgage payments will be covered by the monthly rental payments. In order to determine this, each lender has their own rental ‘stress test’ but generally speaking, it involves having a rental income buffer of 125% if you’re a basic rate tax payer, or 145% as a higher rate tax payer. If you chose to purchase your property through a Special Purpose Vehicle (SPV), the 125% ratio is also used.
Thirdly, the type of mortgage product you chose can impact how much you can borrow. For example, if you chose a Fixed Rate, you are likely to be able to borrow more than if you opt for a Tracker Rate, due to the fact that your monthly payment would be guaranteed and the lender therefore knows it’s affordable to you.
Why do most investors chose an Interest Only Mortgage for a Buy to Let?
Investors often chose Interest only mortgages, primarily because the monthly payments tend to be lower than that of a Capital Repayment loan. This approach can free up your monthly finances for further investments, offering landlords increased flexibility and potential tax efficiency.
It’s worth noting that with an Interest Only mortgage, you will need to pay the loan off in full at the end of the loan term so need to have a repayment strategy in place. Such strategies may include selling the property or using funds from savings or other investments.
Depending on your attitude to risk, you may still prefer to opt for a capital repayment mortgage for your BTL. If you are not sure what is the best option for you, get in touch and one of our team can discuss your circumstances and options with you and help advise you on the best product for you.
What are the risks involved in getting a Buy To Let
Generally speaking, property investors rely on their rental income to pay their monthly mortgage payments. However, if a landlord is unable to secure a tenant and the property is left unoccupied, their is a chance that they may not be able to afford the monthly payments.
Likewise, if a tenant gets behind on their rent or the property needs major repairs, the overall costs could increase, eating into your profit margin.
The property could be repossessed if you’re unable to keep up with repayments.
How can I increase my chances of being accepted for a Buy To Let Mortgage?
Criteria for acceptance can vary from lender to lender but meeting the below criteria may widen your options with lenders.
- Owning your own residential property
- Have a minimum salary of £25,000 (Not all lenders require this but most do)
- Maintaining a good credit profile
When considering a Buy To Let Mortgage, it’s always worth keeping a financial cushion aside in case of rental voids or things going wrong in the property that aren’t covered by insurance.
Should I buy my Buy To Let in my personal name or through a Limited Company Special Purpose Vehicle (SPV)?
Many property investors now purchase properties through an SPV rather than in their personal name as it can be very tax efficient depending on your circumstances. It is always worth liaising with your accountant and a Property Tax Specialist right at the start of your property investment journey, to decide the best option for you.
Can I get a Buy To Let Mortgage with a poor credit history?
There are some specialist lenders who are happy to lend to investors with a less than perfect credit history. However, due to the fact that they will see you as higher risk, there are likely to be fewer options available to you. This means that the interest rates available to you are likely to be less favourable than if you had a perfect credit history, but it doesn’t mean that you won’t be able to find a suitable deal.
If you are concerned about how your credit history may affect your eligibility for a BTL, please get in touch with our team.
Can I rent my Buy To Let property to a family member?
The vast majority of people who purchase a BTL, do so for investment purposes. However, occasionally, the motive for investing in a BTL is to support a family member rather than for financial gain. Most lenders do not allow you to rent out your Buy To Let to a family member and doing so will be a breach of your mortgage terms.
In short, if you intend to rent your property out to a family member, you need a different type of mortgage called a Regulated Buy to Let Mortgage. This type of mortgage is regulated as there’s a higher chance that if you rent to a family member, you will charge less rent or be more flexible about them making their rental payments on time. This is seen as higher risk to the lender.
For this reason, the lending criteria is much more complex so these kind of mortgages are regulated by the Financial Conduct Agency (FCA). This means that the underwriting process may be more rigorous. In most circumstances, the lender will look at your own personal income when assessing affordability to ensure that you could afford the monthly rental payments, should your tenant not pay the rent.
It is important to always disclose to your lender if you are planning on renting out to a family member as failing to do so could result in you breaching your mortgage terms and your lender calling their loan in early.
If you are considering renting your property to a family member, it’s always wise to seek advise from a mortgage adviser who can seek the best mortgage product for your circumstances.
Can I get a Buy To Let as a First Time Buyer?
It is possible to get a Buy To Let as a First Time Buyer but a larger deposit may be required and you may have fewer options. This is due to the fact that you’ve never owned a property before and have no previous landlord experience, meaning the lender will view you as higher risk.
If you’re a First-Time Buyer looking to invest in a BTL, get in touch with our team to discuss your options.
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.