Buy to Let Mortgage

And on this episode of the mortgage and protection podcast, we have Scott here from Properties to explain how the buy-to-let mortgage process works. It's great to chat with you, Scott. How's it all going? Yeah, very well, thank you. This one looks to be quite interesting, so should be good. It does. We've got a fair few questions here, haven't we? So let's get straight into them then. So naturally the first question asks, what is a buy-to-let mortgage and how does it differ from a regular mortgage? Buy-to-let mortgage is designed specifically for properties that you plan to rent out, so investment type properties, things you aren't going to live in. So the main difference will be kind of the rate

and lender choices from a client's perspective and how the lender calculates loan amounts, which I think we've come up to later on. I've seen a question for that later as well. So, but the biggest difference really is, are you going to live in it? Yes, it's residential. No, it's buy-to-let. And then there's a few more points to cover off on that later on. Right, okay, brilliant. Thank you for that. So let's move on to the next two questions these follow on. So what are the eligibility criteria for obtaining a buy-to-let mortgage? And what factors do lenders typically consider when assessing a buy-to-let mortgage application? This is quite an open question. Eligibility point, there's virtually,

there's something that's one or two points really, or maybe even one, you have to be an adult in the UK. Well, in the UK, you have to be an adult to buy a buy-to-let. If you're not living in the UK, there are things like expat or non-domicile kind of mortgages. You've got those ones for investors. They're possible. If you've got bad credit, we can do mortgages. If you've got, if you don't own your own home, so you're a first time buyer and a first time landlord, we can do the mortgage. If you want to do it in a limited company with your personal names, it can be done. So criteria is actually very, very wide. Virtually everybody is eligible, assuming you're an adult in the UK, for a buy-to-let mortgage.

That then becomes a bit more specific. If you've got certain criteria you need to meet, if you're a first time landlord with a small deposit, it will be some lenders. If you've got a large deposit, it changes the lender choice. But let's say if you're 18 and you're living in the UK, those two tick boxes straight away make it very easy for us to start looking at lenders, checking your deposit amount, and then going through with the client explaining how affordability works as well. Right, okay, there we go. And actually speaking of deposit, with all that in mind, how much deposit is usually required for a buy-to-let mortgage? So the majority of the time, 25% deposit, 75% loan, there are a few exemptions to that.

There are a few lenders that used to do 85% buy-to-lets. They were obviously very expensive. I think there's a few lenders now currently doing 80 still. But I would say for most people, if you want to have the kind of normal rates, you're looking at 25% deposit. If you can improve that to 40% deposit, even better. Okay, so that's clear there. So let's move on to this question people would like to know. Can you explain the concept of rental coverage and how it affects buy-to-let mortgage applications? Absolutely, so to give an example, so the lender wants rental coverage. So if their mortgage amount is going to be a thousand pounds, if the mortgage is a thousand pounds a month, you need to have rental income obviously

of at least a thousand pounds a month to cover the mortgage amount. But the lender wants them to be more rental income than that, and typically this is by 125%. So in that example, 1,250 pounds of rental income to cover a 1,000 pound mortgage. And that surplus covers things like pairs to the property, you know, if boiler needs doing, fences come down in a storm while we get every winter here in the UK, rooftops blown off, if there's a vacancy at some point in the future, that surplus should build up in the account and be able to cover those points. So that's why the lender likes that. Because if you live exactly pound for pound, there's no money in the pot to cover things which could cause the property to become vacant

in the future, and that impacts the lender's security. That's rental coverage changes depending on the type of product you're having and how you're purchasing it. So if you're a higher rate taxpayer in the UK and you're buying in your personal name, well, tax liability is higher than somebody that would be like, you know, a lower rate taxpayer. So your coverage is 145% to 125. If you're a lower tax payer, it's 125. If you buy an limited company, it's 125% as well because tax rates through companies are lower. And then the product can change that affordability to a five year versus two year year. It can change the way the lender calculates that coverage. So yeah, it can be a little bit complex

for clients looking at it, but we can explain it to them in a few minutes. Right, okay. Well, thank you for breaking all that down there and some points to bear in mind. So moving on then to this question, are there any specific fees associated with Bitalette mortgages that borrowers should be aware of? So the standard mortgage fees, a valuation fee in almost all cases, especially for Bitalettes, fortunate to have the value of the property. So if you're buying a very expensive property, the valuation fee will be up. But usually budget four, 500 pounds for that, that should cover most people's kind of requirements. Legal costs, you're gonna have to, some lenders will have dual representations.

You can have one solicitor do yours and the banks. Some clients like to have their own and the banks have separate. That can change the fee structure. But again, I tend to say around a thousand pounds should cover most people's scenarios, but these fees will be outlined to you before we get anywhere into the application. So you'll know roughly what you're paying. And the last thing is a render fee. Now this one changes a lot. And it's changed a lot in the last couple of years. So typically clients were used to seeing fixed fees, either a 500 pound or a thousand pounds fee on a loan, changed and limited company mortgages became more popular. Lenders changed their fee structures to percentage based.

So now you'll tend to see a 2% arrangement fee or a 1% arrangement fee, depending on both products. And that also factors into the affordability point that we were discussing in the previous question. But lenders got smart with the recent inflation changes we're all very aware of mortgage products rates went up accordingly. And a lot of mortgages then didn't fit affordability. Lenders got a bit creative. Instead of having a 6% product with a 2% fee, they've moved that rates down, taken off the rate and stuck it onto the fee. So you'll have products now with lower rates, lower mortgage rates, but with a much larger fee. This allows you to have a much better affordability calculation. So if the rental income on your property doesn't meet a loan,

you can switch you to one of the products with a very high fee, 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 instantly kind of get afraid by this product, but they're not, they're really very useful for people who have low yielding properties, for example. So in the South or Southeast, those products can be very useful. Right, okay, brilliant. Well, there we go. The costs to consider there. Thank you for breaking all of that down as well. So let's move on to this question then. So people would like to know, should I choose interest only or repayment

on a buy to let mortgage? That depends on the client. I mean, in 10 years, I have only ever seen one repayment buy to let mortgage, but they can be done. Depends on your goals and your circumstances. If you do want a repayment buy to let, there aren't very many lenders that will do them because it pushes up the monthly payments, which means the rental increases. It complicates the affordability of the mortgage. So interest only is, like I say, almost always the option chosen, but there's a good reason for that because the properties investment, the mortgage interest, if you're going through a company, limited company, which most people do these days, can be offset against your profit in the company.

I'm not accountant, so I'm gonna be very loose on covering that often. If you wanna know more, please speak to a professional. Going on the interest only route allows you to be a lot more tax efficient, generally speaking. And it also means that the profit margins on month to month are better. So most people are buying these for cashflow. They want an income. They're not looking to own a property outright in 25 years. They want the income today. So interest only allows you to have better cashflow. And then there's the long-term goal for people. If the real long-term goal is for you to have cashflow now and income, but for children or grandchildren to inherit these in the long-term future, the best option, typically speaking,

is to have interest only now so you get the cashflow and take up life insurance to the value of the debt. Now, assuming that we all live to a nice old age, we'll erode the value of that debt and your property will have increased in value, which is a good thing. Life insurance in place to cover that value of debt. So when eventually we will pass away, life insurance pays out, clears the debt. Your children or grandchildren now have an unencumbered property. So you've benefited from the income. Your children benefit from the income and a house at the end. So it's a good way of doing things, but it really does depend on long-term goals and ambitions for the clients. And we can discuss those with people

on a one-to-one basis. Okay, so something to bear in mind there, and that leads us onto the next question. I'm not sure how much you can say here either. So what are the implications of recent tax changes on Bitelet mortgages? Yeah, I'll be very loose because I'm not an accountant. So tax changes came into effect in 2017, which meant that before that, if you owned a Bitelet in your personal name, you could offset the mortgage interest against your tax bill, much like you can today in the limited company. Picture my seat wised up and changed that. So over the following four years, I think it was, that decreased so you could deduct 75%, 50%, 25%, and then nothing in 2021, I think it was, which means that if you own a Bitelet in your personal name,

it's very inefficient from a tax perspective. All of that income is taxed fully, and the mortgage comes off after. If you've got any familiarity with corporate structures, you'll know that expenses are paid before tax, whereas personally, they're taxed, then you pay expensive. But most people these days, owning a Bitelet in your company is far more efficient because you just offset the tax. It makes them a lot better for cash flow, a lot more profitable. Right, okay, there we go. Thank you for that. So let's move on. We're getting through these questions now, aren't we, Scott? So the next one here asks, are there any restrictions on using a Bitelet mortgage for properties in certain areas or for specific tenant types?

So some things may place restrictions on Bitelet mortgages if you're looking at HMOs, houses of multiple occupants or multi-unit 300 blocks or MUFBs, as we call them, which is kind of a house converting into two flats, for example, different lenders and different products for those rates change. So you might have to have a different lender choice. The product might not be as cost-effective as a single Bitelet, for example, but there's no real other restrictions on location, assuming that the value of comments come back that the property is saleable, marketable, rentable, and the property is a good security for the bank. You shouldn't really have any other restrictions in place. Another one to consider, obviously, HMOs and MUFBs,

student let's, so tenant types can change things. So if you go for students, students tend to trash things. We've all been students before. We all know what student houses are like. They stink, they're dirty, they're messy, and they need painting every year. So different products for students. Most, if you're letting to professionals or young families, those are fine for pretty much every Bitelet lender. Vulnerable tenants is a bit of a niche one. 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 very, very key to getting our case completed. Right, okay. So again, some points to bear in mind there. So let's move on to this question.

Are there any government schemes or support available specifically for Bitelet investors? So that's interesting. Unfortunately, there's no specific government schemes for Bitelets that I'm aware of. Most of the support was geared towards homeowners, people who want to buy homes. The living's a residential sign of transactions, but the exception of perhaps maybe grants for solar panels or renovations and things, the larger commercial properties. There's no other scheme I'm aware of that affect Bitelet investors. Right, okay. Well, there we go. So let's continue then. People would like to know, can you discuss the importance of property management and its impact on Bitelet mortgages? Absolutely.

This is really key. It's all well and good finding a permanent property. Purchasing that property with a great Bitelet mortgage with the help of a brilliant broker, hopefully us, you don't have to manage that property. Going back to tenant types a moment ago, students, vulnerable tenants, professionals, families, you want to make sure you're picking the right tenant for your property, the right tenant for your risk profile, because if you've got a high attitude to risk, you can go for students. Students, you'll get more money because you can put more people in the 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 families will tend to respect the house they're living in because they've got children and things, they want to make it a nice environment. So you're likely to have lower term tenants, you respect the property. But as a single let, you have to start your level of rent, generally speaking. So management of your tenants is the first key point. Who do I want in my property? And do I want them there for a long time? Managing that property then comes down to whether the property is local to you. So if you live in London and you've bought a Liverpool, probably don't want to manage it yourself. You don't want to go up and down to the property to fix leaks, fences, et cetera. So if the property is not local,

or even if it is local, but you don't want to be involved, good property manager. So most letting agents will do that for you at a fee. They'll take a percentage off your rental and they will manage the clients for you. Tenants checking in, checking out, and your repairs. Annual reviews, tenancy agreement reviews, checking on the property. All sorts of things can be done via a letting agent. And for most people, unless you're making this a career, I would suggest that's probably a very good first step. If you're somebody involved in professional, that can help you learn how to do those steps. Okay, so actually lots of key pointers there to take away from the episode. Thank you for that. So let's move on.

We've got three or four questions left. Now, 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? Okay, so the first and obvious ones are that if you miss a mortgage payment, the very first thing that will happen is that will start to impact your credit report. It will be reported as a missed mortgage payment on your credit report, which will impact your ability to firstly re-mortgage your buy-to-lets, purchase new buy-to-lets. If you own your own home, re-mortgage or buy a new home. Credit cards, car finance, it will impact your credit report across the board. So really wide reaching impact if you start to miss mortgage payments.

Because if you miss a telephone bill or you miss a utility bill, gas electric, those things obviously are bad and will impact your credit score, but not so much as a mortgage payment. The last thing you would have to do is really miss one of those. But further from that, if you miss that one, when you miss several more, you can't bring it up to date, the lender will be speaking to you regularly about how you're gonna resolve this. And the last resort will be repossession. They repossess the property and instead it's to recover their debt. Any proceeds thereafter will be released to you. So you might end up with a small amount of cash, but it won't be the full equity that was in the property because the lender's likely to sell it quickly.

So I'm a market value to get the cash back. Minus legal fees, you'll end up with something. And then you really won't get a mortgage for quite some time. So really, really impact your ability to run this as a business and other wide reaching parts of your life. The potential risks with investing in a buy-asleep property, there are pros and cons to everything. There's obviously great pros in that you've got cash flow, you own real estate now, which will increase the value hopefully with time. The negative side is that it will, it can be hard to manage. You can, there are bad people and then you will have bad tenants sometimes. They will not pay their rent. They will trash the property. I had it for one of my properties.

They completely trashed the garden and garage in the back of the house. Oh gosh. And it's disheartening, but it happens and you have to move on for it. That's why having these rental calculations in place are effective because we had money in the pot to make those replications and fix it when the tenants left. The risk is that you can have a poor tenant who doesn't make payments on time, which can impact your ability to make mortgage payments. So you need to be really understanding how this business model is going to work for you. A cash flow management, the brokers can help with that too. We can obviously help with that. Okay. Well, thank you for that Scott. Again, some really important key points there.

It's all about weighing up those pros and cons, isn't it? So let's move on to this next question. Can you explain the process of adding additional properties to an existing Vitalets portfolio? Yeah. So there's two primary ways of doing this. It's not the only ways, but the two kind of key ways I tend to see. People come to me with the one property they own and they want to refinance to take equity out to buy further property, which is fine. Easy, straightforward. We do the refinance, give the client back a bunch of cash and the client goes and buys second property. We refinance, we do the purchase for that one too. The client's now got two. Some of the clients like to be a little bit more risk averse

and they like to let the cash flow build up. So they might only have one or two properties and they'll wait for the cash flow, the bank balance to build up enough. They've got enough cash to go and buy the second or third property. So right, we're wrong way of doing it, but the process is exactly the same as the first one you did. 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 really. Okay. Brilliant. Thank you for that. Now, what steps should a first time buy-to-let investor take before applying for a mortgage? So any top tips here, Scott? Yeah. Really, really understand firstly what your business model wants to be,

who your tenants want to be, what sort of properties you want to own and where you want to own them. And I guess also including that, what your goal is, what's the five year or 10 year goal. Some clients, they just want two or three properties that top up their income and cover their holiday fund every year. Some clients want to replace their income. They want to retire from full-time work and make property their full-time job. Understanding which route you want to take and where that end goal is will certainly impact how we deal with you and it probably impact your business plan. Have a really good idea of what issue you want to achieve upfront and location. Location is key. I've said it, I think in several podcasts.

Knowing where you want to buy and making sure you know the area well. There's no point buying up in the Highlands of Scotland because the rental yields are great, which they can be. But if you don't know the area and it's heading to a milestone, management's difficult, going to visit the property's difficult, you might buy the wrong house on the wrong street. The area itself looks good online and you've got nobody around to give you advice. So location, pick an area that you know well, have family and would be my strongest recommendation to people. Okay, there we go. So some strong key pointers there as well. Now Scott, you've demonstrated throughout this episode how a broker can help. Have you got anything else to add?

Any final thoughts? Particularly if you're new to Bitalettes, maybe you've only got one or two Bitalettes we were thinking of getting in. Now is a first time landlord. Speak to us. We can help you understand your business model because you might not really know what it is you want to achieve. And we can run through that with you. We can run through properties with you, give you our thoughts and opinions and they will just be thoughts and opinions. We can't make the decisions for you, but on tenant types, property types, locations, what we think we should be aiming for, then pick your business model. If you give us a business model and you give us a property that doesn't match that, we'll tell you.

I think this is the best option for you, given what you've told us you want to achieve. So we can help steer you and make sure you make the right decisions to get to your end goal. Brokers are invaluable for that. And after all that, we make sure the process of actually buying and securing that property goes smoothly. Okay, well, there we go. Thank you for that Scott. That's been really thorough. So hopefully that's proved useful to anyone listening to this. And I'm sure we'll speak to you on another episode soon. Yeah, I look forward to it. That was quite thorough. So hopefully there's some useful bits in there for people. Please note, 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.