Buy to Let Mortgage

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Buy to Let Mortgage

Buy to Let Mortgage

Scott West is here to explain how the Buy to Let mortgage process works.

What is a Buy to Let mortgage and how does it differ from a regular mortgage?

A Buy to Let mortgage is designed specifically for properties that you plan to rent out – investment properties that you aren’t going to live in.

The main differences are around the mortgage rate, lender choice and how the lender calculates the loan amount, which we’ll come on to later. The biggest difference really is, are you going to live in it? If that’s yes, it’s residential. If it’s no, it’s a Buy to Let.

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?

In terms of eligibility, you have to be an adult to get a Buy to Let in the UK. If you’re not living in the UK, there are things like expat or non-domicile mortgages for investors. They’re possible. If you’ve got bad credit, we can still do mortgages.

If you don’t own your own home, so you’re a First Time Buyer and a first-time landlord, we can get you a mortgage. If you want to do it in a limited company or in your personal name, it can be done. The criteria is actually very wide. Assuming you’re an adult in the UK, virtually everybody is eligible for a Buy to Let mortgage.

It then becomes a bit more specific. If you’ve got certain criteria to meet, because you’re a first-time landlord with a small deposit, for example, only some lenders will be suitable. If you’ve got a large deposit, it widens the lender choice.

But if you’re 18 and living in the UK, it’s very easy for us to start looking at lenders, checking your deposit amount and then explaining how affordability works, as well.

How much deposit is usually required for a Buy to Let mortgage?

The majority of the time it’s 25% deposit, 75% loan. There are a few exemptions to that. A few lenders used to do 85% Buy to Lets but they were obviously very expensive. A few lenders are currently doing 80% [podcast recorded in October 2024].

For most people, if you want normal rates you’re looking at a 25% deposit. If you can improve that to 40% deposit, even better.

Can you explain the concept of rental coverage and how it affects Buy to Let mortgage applications?

The lender wants rental coverage. If the mortgage amount is £1,000, you obviously need to have rental income of at least £1,000 per month to cover the mortgage amount. But the lender wants more rental coverage than that – typically they want the rent to be at least 125% of the mortgage amount.

In that example, you would need £1,250 of rental income to cover a £1,000 mortgage. That surplus covers things like repairs to the property, replacing the boiler, or if the fence has come down in a storm or some roof tiles have blown off.

If there’s a vacancy at some point in the future, that surplus should build up and be able to cover that. It’s why the lender likes that coverage – because if you live exactly pound for pound, there’s no money in the pot to cover those things. That could cause the property to become vacant in the future, which impacts the lender’s security.

That rental coverage changes depending on the type of product and how you’re purchasing. If you are a higher rate taxpayer in the UK and you’re buying in your personal name, your tax liability is higher than that of a low rate taxpayer. So your coverage is often 145%, while for a lower taxpayer, it’s 125%.

If you buy the property in a limited company, it’s 125%, because tax rates for companies are lower. The product can change that affordability too. A five-year fixed rate versus a two-year deal can change how they calculate that coverage. So it can be a little bit complex, but we can explain it to you in a few minutes.

Are there any specific fees associated with Buy to Let mortgages that borrowers should be aware of?

There are standard mortgage fees and a valuation fee in almost all cases, which for Buy to Lets is proportional to the value of the property. If you’re buying a very expensive property, the valuation fee will be higher. Usually, budgeting £400 to £500 for that valuation fee should cover most requirements.

You will also have legal costs, and some lenders will have dual representations where one solicitor does both yours and the banks. Some clients like to have their own separate to the bank’s, which can change the fee structure. Around £1,000 should cover most scenarios.

All fees will be outlined to you before you start an application so that you’ll know roughly what you’re paying.

How do arrangement fees work on Buy to Let mortgages?

This one has changed a lot in the last couple of years [podcast recorded in October 2024].
Typically, clients were used to fixed fees of either £500 or £100, but as limited company mortgages became more popular, lenders changed their fee structures to be percentage based.

Now, you tend to see a 1% or 2% arrangement fee, depending on the product. That also factors into the affordability point. Lenders got smart with recent inflation changes and mortgage product rates went up accordingly – but then a lot of mortgages then didn’t fit affordability.

Lenders then got creative. Instead of having a 6% product with a 2% fee, they moved that rate down and made up the difference via the fee. So we have products now with lower mortgage rates, but a much larger fee.

This allows a much better affordability calculation. So if the rental income on your property is too low, you can switch to a product with a high fee and a low rate. It allows you to still get the mortgage and the total cost of that product is the same. You’re essentially just deferring some of that interest. So sometimes you’ll see products now with 7% fees.

People are instantly afraid of these products, but they’re actually very useful if you have a low yielding property. In the south or southeast, particularly, those products can be very helpful.

Should I choose interest only or repayment on a Buy to Let mortgage?

It depends on the client – although, in 10 years I have only ever seen one repayment Buy to Let mortgage. But they can be done, depending on your goals and your circumstances.

Not very many lenders offer repayment Buy to Let because it pushes up the monthly payments, which means the rental coverage increases and complicates mortgage affordability.

Interest only is almost always the option chosen, for good reason – because if you’re going through a limited company, which most people do these days, the interest can be offset against your profit in the company.

I’m not an accountant, so if you want to know more, please speak to a professional. But generally going down the interest only route allows you to be more tax efficient and the profit margins are better.

Most people invest in Buy to Let for cash flow. They want an income. They’re not looking to own a property outright in 25 years, they want the income today. Interest only allows you to have better cash flow.

If the long-term goal is for you to have cash flow and income now, but for your children or grandchildren to inherit these properties in the future, the right option is also to have interest only. You get the cash flow now, and take out life insurance to the value of the debt. Assuming that we all live to a ripe old age, you erode the value of that debt and your property will have increased in value, which is a good thing.

Life insurance covers that debt, so when eventually you do pass away, your children or grandchildren now have an unencumbered property. You’ve benefited from the income, your children benefit from that income and gain a house at the end.

That’s a good way of doing things, but it does depend on long-term goals and ambitions for the clients. We can discuss those with people on a one-to-one basis.

What are the implications of recent tax changes on Buy to Let mortgages?

I’ll be very loose because I’m not an accountant. Tax changes came into effect in 2017 and before that, if you owned a Buy to Let in your personal name you could offset the mortgage interest against your tax bill.

HMRC then wised up and changed that. Over the following years, that allowance decreased, so you could deduct 75%, 50%, 25% and then nothing in 2021. So now, if you own a Buy to Let in your personal name, it’s very inefficient from a tax perspective. All that income is taxed fully and the mortgage comes off after.

In a corporate structure, expenses are paid before tax, whereas personally you’re taxed and then you pay your expenses. For many people these days, owning a Buy to Let in a company is more efficient because you can offset the tax. It makes for better cash flow and profitability.

Are there any restrictions on using a Buy to Let mortgage for properties in certain areas or for specific tenant types?

Some lenders may place restrictions on Buy to Let mortgages if you’re looking at HMOs (houses of multiple occupants) or multi-unit freehold blocks (MUFBs) – which could be a house converted into two flats, for example.

You might have a different lender and product choice for those, and the product might not be as cost-effective as a single Buy to Let, for example.

But assuming that the valuer’s comments confirm that the property is saleable, marketable, rentable, and the property is good security for the bank, you shouldn’t really have any other restrictions.

Obviously tenant types can change things. You might go for students in an HMO or MUFB, and we all know what student houses are like. They’re dirty, messy and they need painting every year. So there are different mortgage products for student Buy to Let.

If you’re letting to professionals or young families, those are fine for pretty much every Buy to Let lender. Vulnerable tenants can be a niche area, so if your plan is to let to vulnerable tenants, speak to a broker because the lender choice and presentation of that case will be key in getting that case completed.

Are there any government schemes or support available specifically for Buy to Let investors?
Unfortunately, there are no specific government schemes. Most of the support has been geared towards people who want to buy homes to live in, on the residential side.

There may be grants for solar panels or renovations, or for the larger commercial properties, but there’s no other scheme I’m aware of for Buy to Let investors.

Can you discuss the importance of property management and its impact on Buy to Let mortgages?

This is really key. It’s all well and good finding a perfect property and purchasing that with a great Buy to Let mortgage with help from a brilliant broker – hopefully us. But going back to tenant types – students, vulnerable tenants, professionals, families… you want to make sure you’re picking the right tenant for your property and your risk appetite.

If you’ve got a high attitude to risk, you can go for students. You’ll get more money because you can put more people in a house, but the risk is higher because students tend to trash things.

If you want a low risk approach, go for a young professional or a family because they tend to respect the house they’re living in. They want to make it a nice environment and may become long-term tenants who respect the property.

But there’s a single level of rent, generally speaking. So management of your tenants is the first key point. Who do you want in your property? Do you want them there for a long time?

Managing that property then comes down to whether the property is local to you. If you live in London and you’ve bought in Liverpool, you probably don’t want to manage it yourself. You don’t want to go up and down to the property to fix leaks and fences.

If the property is not local – or even if it is local, but you don’t want to be involved – you need a good property manager. Most letting agents will do that for a fee. They’ll take a percentage off your rent and manage the clients for you.

They check tenants coming in, manage repairs, do annual tenancy agreement reviews, checks on the property – that can all be done via a letting agent. Unless you’re making this your career, I would suggest that’s probably a good first step. Find a professional that can help you learn how to do those steps.

What are the consequences of defaulting on a Buy to Let mortgage?

If you miss a mortgage payment, it will impact your credit report. It will be reported as a missed mortgage payment, which will impact your ability to remortgage your Buy to Let and purchase new Buy to Lets.

If you own your own home, it will also affect your chances of a remortgage or to buy a new home… plus credit cards, car finance etc – it impacts your credit report across the board.
It’s serious if you miss mortgage payments. If you miss a utility bill, that’s bad and will impact your credit score, but not as badly as missing a mortgage payment.

If you miss one, then miss several more and you can’t bring the debt up to date, the lender will be speaking to you regularly about how you’re going to resolve this. Their last resort will be to repossess the property and sell it to recover their debt. Any proceeds thereafter will be released to you.

You might end up with a small amount of cash, but it won’t be the full equity from the property because the lender is likely to sell it quickly, at under market value to get the cash back, minus legal fees. You really won’t be able to get a mortgage after that for quite some time. It will really impact your ability to run this as a business and other wider reaching parts of your life.

What are the potential risks involved in investing in Buy to Let properties?

There are pros and cons to everything. There’s obviously great pros here in that you’ve got cash flow and you own real estate which will hopefully increase in value with time. The negative side is that it could be hard to manage. You will have bad tenants sometimes who won’t pay their rent or damage the property.

I had this with one of my properties. They completely trashed the garden, garage and the back of the house. It’s disheartening, but it happens and you have to move on from it. That’s why these rental calculations are effective, because we had money in the pot to make those rectifications and fix it when the tenants left.

A tenant who doesn’t make payments on time can impact your ability to pay the mortgage. You need to really understand how this business model is going to work for you. We can obviously help with that too.

Can you explain the process of adding additional properties to an existing Buy to Let portfolio?

There are two primary ways of doing this. Some people come to me who own one property and want to refinance it and take equity out to buy further property. That’s straightforward. We do the refinance, give the client back some cash and they buy a second property.

Some clients are more risk averse and like to let the cash build up. They might have one or two properties and will wait for the bank balance to build up enough until they’ve got enough cash to go and buy the second or third property.

There’s no right or wrong way of doing it, and the process is exactly the same as when buying the first one. Come to us with the property, the details, the criteria, and we’ll run through the mortgage with you. There’s no more to it than that.

What steps should a first time Buy to Let investor take before applying for a mortgage?

Understand firstly what your business model will be, who you want as your tenants, what sort of properties you want to own and where. Also, include your five year or ten year goal.

Some clients just want two or three properties that top up their income and cover their holiday fund every year. Others want to replace their income – they want to retire from full-time work and make property their job.

Understanding which route you want to take and that end goal will impact how we deal with you and your business plan.

Location is key. I’ve said it in several podcasts – know where you want to buy and make sure you know the area well. There’s no point in buying up in the highlands of Scotland if you don’t know the area and it’s 800 miles from you.

Management is difficult. Going to visit the property is difficult. You might buy the wrong house on the wrong street. The area looks good online but you’ve got nobody around to give you advice. Instead, pick an area you know well – that would be my strongest recommendation.

What else do we need to know about Buy to Let mortgages?

If you’re new to Buy to Let, or even if you have one or two properties already, we can help you understand your business model. You might not really know what you want to achieve – we can run through that with you.

We can look at properties with you and share our thoughts and opinions. We can’t make the decisions for you, but we can talk about tenant types, property types, locations and what we think you should be aiming for.

If you give us a business model and a property you like doesn’t match that, we’ll tell you. We help steer you and make sure you make the right decisions to reach your end goal. Brokers are invaluable for that.

After all that, we make sure that the process of actually buying and securing that property goes smoothly.

YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

MOST BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.