Buy to Let Advice
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Buy To Let Mortgages
Buy to Let Mortgages have almost become a standard offering from the majority of banks and building societies. In the past if you wanted a mortgage to buy a property to rent out you would have needed to have access to specialist lenders, or you would have needed to purchase your property with cash. This made it difficult for smaller investors to enter the market as the lending criteria was very specific and aimed mainly towards professional landlords. However, as time has gone by lenders have relaxed their stance on this and the options available to investors, whether big or small have increased dramatically.
With the right Mortgage Broker or Adviser to aid you along the way, it has never been easier to access a Buy to Let Mortgage. Renting a property out has become quite attractive, as the long-term returns have been known to be quite healthy to say the least. Whether you are a First Time Landlord, Portfolio Landlord or someone that wants to own a Home in Multiple Occupation (HMO), Lenders nowadays will most certainly have options available. It can still be quite a minefield and getting the right mortgage advice is as important as finding the right property.
Our specialist Mortgage Brokers can go through the process and tailor their advice to your circumstances. So, whether you’re just starting out on your Buy to Let journey or you’re a seasoned investor, get in touch with us at Just Mortgage Brokers to see how we can help.
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. Follow the link and read our blog post ‘Advantages and Disadvantages of a Buy to Let Mortgage’, or get in touch with one of our specialist advisers to see how they can help.
The rise in popularity of Buy-to-Let mortgages, and the sheer number of products now available on the market – both from high street banks and specialist lenders – means potential borrowers and landlords now face a huge amount of choice when trying to decide which will be the most suitable Buy-to-Let mortgage for their requirements. How can they best compare mortgages and recognise which one will be the right option?
Fortunately, with Buy-to-Let mortgages now being a mainstream activity, there are many opportunities to compare rates and conditions via ‘best buy’ tables and websites that advertise widely. These will give you a good picture of the current state of the market.
However, these tables do not tell the whole picture. What looks like the most suitable mortgage for one borrower might fall short of the aims and priorities for the next. While most are weighted towards value for money, representing the lowest costs over a certain period (which will of course be important to most people), not all of them will reflect other priorities or factors – for example, the desired duration of the mortgage or the amount of deposit the borrower is able to supply. These will all have a bearing on the possible mortgage deal, and you might be able to access a rate that is not listed in a public online list, especially with regard to deals offered by specialist lenders who do not advertise their rates in the same way as high street banks.
Most people who are new to Buy-to-Let mortgages might not fully understand what to look for, or where to start, and the process can be time consuming. The most useful way to compare Buy-to-Let mortgages is to discuss your needs with an experienced mortgage broker, such as one of our team here. They have access to a huge range of Buy-to-Let mortgage products from a variety of lenders, and will be able to recommend the most suitable options to you after considering your targets and requirements for a mortgage.
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.
This is an age-old question and there are various options that you can think about.
- Turning your property into a HMO (Home in Multiple Occupation) can really make the rental yields shoot up. This option can work quite well, as effectively, you can rent on a per room basis. You will have to seek the correct permissions from the Local Authority and also be willing to service a number of individual tenants in one property.
- Look for properties that have good rental yields. Purchasing a property for say £250,000 may seem like a good idea as you may be able to rent it for say £850 per month. However, purchasing two properties for £125,000 each that rent for say £550 per month will provide you with more profit in the long run against the money you have invested. Your investment will also be split over two properties which will also split the risk of having void periods where you may not have a tenant in a property.
- Getting the right mortgage advice is just as important when looking to maximise your rental profits. An experienced Mortgage Broker can help you access the most suitable mortgage rates for your needs as well as compare the small print. The cheapest rate isn’t always the best rate when you take into account the lenders arrangement fees and other associated costs. Getting the right product can sometimes mean the saving of several thousands of pounds over the course of a mortgage.
- Choosing an Interest Only Mortgage over a Repayment Mortgage is another way to boost your rental profits. While a Repayment Mortgage will reduce your balance over the course of the mortgage it does eat into the profit you make on a month to month basis. An Interest Only Mortgage on the other hand means you will only pay the interest element of your mortgage payment every month to the lender. This is a lot less than the amount you will have to pay on a Repayment Mortgage which in turn will leave you with more profit on a month to month basis.
There are pros and cons to both types of mortgages hence why it is important to get the correct professional advice.
This really depends on how risk averse a landlord is. While a Fixed Rate will allow you to know exactly what you pay on a monthly basis, it does quite often carry a slightly higher rate than a Tracker Rate. You will however be protected from any rate rises made by the Bank of England to their base rate.
A Tracker Rate will quite often be slightly cheaper than a Fixed Rate, but at the same time carry the risk of rising along with any rises made to the Bank of England base rate. It can sometimes be attractive to an investor as with a Tracker Rate you can also benefit from any rate reductions made to the Bank of England base rate as your rate will also reduce along with it.
Generally speaking, Buy to Let Mortgages are designed for borrowers purchasing or remortgaging a residential investment property and who already occupy their own home, with or without a mortgage.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.
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 other and 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;
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.
- 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.
The short answer is yes. Leasehold property is no different to Freehold property as long as there is a suitable Lease in place. Leasehold property does have associated costs and charges, such as Ground Rent and Annual Service / Maintenance Charges, which are made in respect of the upkeep of communal areas and services carried out by the Landlord.
The term remaining on the lease may have an impact on the value and suitability for mortgage purposes. A lease with a term of less than 70 years remaining is likely to result in a lower valuation of the property and subsequently a reduced mortgage amount and term. A new or extended lease is the usual method of dealing with this issue. This is negotiated with the current owner and the Landlord
Any Leasehold related charges are taken into account by the lender as a regular commitment and will be factored in to the affordability calculator used when looking at the amount that may be borrowed against the potential rental income. It is therefore vital that you familiarise yourself with any ongoing costs and establish whether these are likely to increase and therefore limit the net income of the investment.
Consideration should also be given to the owner of the Freehold. In the past, investors may have owned a leasehold property and also have in interest in the Freehold of the Building. However, this is becoming less popular with lenders who are no longer happy to accept this if the leaseholder has a significant stake in the Freehold.
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 remortgage, i.e. change from one lender to another. Whilst this is an option that must be considered, here at Just Mortgage Brokers 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
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 Just Mortgage Brokers, we have the specialists who can assist you, let us do the hard work for you!