A HANDY GUIDE TO BUY-TO-LET MORTGAGES

Are you thinking about investing in a buy-to-let property? High tenant demand means buy to lets can offer a lucrative investment for prospective and professional landlords. However, changing terms to tax relief on buy to let mortgages and rising interest rates require landlords to think carefully about the risks and rewards of entering into one. If you’re considering a buy to let (BTL) mortgage, it’s important you understand the differences between a BTL mortgage and a residential mortgage and the different types available to you.

Read our comprehensive guide to find out if it’s the right thing for you, and if so, how best to go about it.

The Basics....

Buying-to-let can be a good way to generate income while also investing for the future – but it can involve a lot of work, it can be risky, and it isn’t easy money by any means. It can help to contact a specialist buy-to-let mortgage adviser even before you get started. They can guide you on the kind of mortgage you’re likely to get, the kinds of properties you could afford, how much rent you could bring in each year, how much tax you’re likely to pay, and – most importantly – how much profit you could expect to make.

If you are buying a property with the intention of letting it out, then you must purchase it using a buy-to-let mortgage rather than a normal residential one. If you already own the home and become what is often called an “accidental landlord” – perhaps you move in to a partner’s home or inherit a property, or you move temporarily for work and want to rent your home rather than sell it – then you will need to obtain permission from your lender, which will normally involve either an increase in interest rate or being made to transfer to a buy-to-let mortgage.

Buy to let mortgages are viewed as higher risk by lenders, meaning there can be higher fees, deposits and interest rates than residential mortgages. But don’t let that put you off completely!

The Criteria

If you’re looking to buy property in order to rent it to other parties, it’s likely you’ll need to make a BTL mortgage application. There are certain criteria you need to meet in order to be considered.

You are eligible for a BTL mortgage if:

• You are looking to invest in residential property (this includes houses and flats)

• You have the financial stability to repay the mortgage

• You own your own home (either with a previous mortgage or outright)

• You have a good credit rating

• You earn over £25,000 per annum

• You are below a certain age. (Most lenders have stipulations regarding the age you are when your mortgage ends which is usually between 70-75 maximum)

Normally you will need at least a 20-25% deposit, with the best rates only available with a 40% deposit.

How do BTL mortgages work?

Buy-to-let mortgages are worked out differently from a normal residential mortgage because they take into account how much you’ll earn in rent. To be eligible for most loans, the rental income will need to cover 100 per cent of the mortgage plus an extra 25 percent. Your borrowing limit is connected to your rental income. This is called a loan-to-value, or LTV amount, which is worked out as a percentage of the property value. An LTV for BTL mortgages is usually around 90%- 95% rather than 100% for residential mortgages. This means that your loan is likely to be lower, due to the perceived high risk factor. Because of this, it’s recommended that you charge around 25%- 30% more for rent than your mortgage payment.

BTL mortgages tend to be interest only, rather than requiring monthly repayments. This means that the loan is to be paid in full at the end of the mortgage term. Interest-only mortgages are cheaper per month than repayment (as you are not making any payments towards the loan itself), so are popular with landlords who want to generate the maximum income each month. However, if you prefer to own the property outright over time, a range of repayment mortgages are available, including fixed rate, discounted rate and tracker mortgages.

Most buy to let mortgages are not regulated by the Financial Conduct Authority (FCA). However, if you are letting the property to a family member, this will be considered as a consumer buy to let mortgage and will be subject to the same regulations as a regular residential mortgage.

What other costs are involved?

Stamp Duty

Stamp Duty Land Tax is paid when you purchase a home. Those who already own a residential property (whether they live in it or rent it out) have to pay an additional 3% on top of the standard Stamp Duty rates.

Valuation fee

Before giving you a mortgage, the prospective lender will need to value the new property, although the cost of this may be included in the general administration/arrangement fee.

Survey

Even if you’ve paid for a mortgage valuation, you should also consider an independent survey. A snagging survey on a new home, or a simple Condition Report suitable for a nearly-new home will cost around £250-£300, a more in-depth HomeBuyer’s Report can cost from £400-£700 while a Building Survey (sometimes called a full structural survey and the best choice for non-standard or older properties) provides even greater detail but can cost up to £900.

Broker’s fee

If you use a mortgage broker to help you get the best deal on your mortgage, you will usually have to pay a fee, although with Embrace Financial Services the first appointment is always free of charge. You should be told exactly what you will be charged when you decide whether to engage a broker.

Conveyancing and legal fees

The process of transferring the legal title from the previous owner of the home to yourself (conveyancing) will cost from around £930-£1,200 for a freehold property and £1,110-£1,390 for a leasehold purchase. Searches will cost around £300 more, plus the Land Registry Fee of up to £540.

Insurance

You will need buildings insurance from the moment of exchange of contracts, and you will need to declare to your insurer that the property is tenanted. You may also want to consider Landlord insurance that would cover you for loss of rental if the property was uninhabitable after a fire or flood, legal expenses insurance if you need to evict a tenant and tenant default insurance that protects you when a credit-checked tenant fails to pay the rent.

Safety and legal requirements

As a landlord you need to make sure the home has an Energy Performance Certificate, a Landlord Gas Safety Certificate for any gas appliances that is updated every year, and working smoke detectors (and in some cases carbon monoxide detectors). An Electrical Inspection Condition Report (EICR) is also now a compulsory certificate to check the electrical safety of the property.

Additional factors to take into consideration

As you know, applying for a mortgage is a not a decision to be taken lightly as the responsibilities are a long-term commitment. To protect your financial security, it’s a good idea to have a plan in place for different eventualities. For example, it’s not uncommon for a rental property to experience void periods in which no rent is coming in. Or, at some point or another, a pipe might burst, or a roof might need urgent repair. As a responsible landlord, you need to be able to provide effective and timely repairs.

To protect yourself from this burden, making a savings plan is vital. Ensure you are saving as much as possible when you have full paying tenants to avoid any stressful situations in the future. This should happen before making an offer on a house. Don’t rely on selling the property to pay the mortgage off! If house prices fall, and you don’t have a backup plan, you’re in serious trouble.

While applying for a mortgage is always a risk, once you have all the information at your fingertips, you can make a better informed decision. One way to help guarantee the safety of your property investment is to ensure you are fulfilling all your duties and requirements as a landlord.

RENTAHOLICS offer a wide range of property management services including professional unbiased inventories, safety assessments and maintenance reports to help you protect your investment. Browse our full list of services to find out how we can help.