Why would I need a buy to let mortgage?If you plan on buying a property to let out to tenants, you need a buy to let mortgage. Buy to let mortgages can often by more expensive than residential mortgages and the amount you can borrow is usually driven by the rental income. The maximum amount you can normally borrow is 75% of the property value. Interest only mortgages are more common than repayment mortgages but both options are available. If you become a landlord, you’ll have responsibilities to your tenants and will need a shorthold assured tenancy agreement.
What costs are involved in getting a buy to let mortgage?
Typically, you’ll need a 25% deposit, and you can expect to pay higher arrangement fees than a residential mortgage.
If you already own a property, there is extra tax to pay when you purchase a buy to let property. You’ll also need to pay income tax on any rental income, on top of your annual Capital Gains Tax exemption. Find out more on the UK government website.
Before securing a buy to let mortgage it’s worth thinking about the extra costs of running a property, above and beyond the mortgage. Property management, maintenance costs, and building insurance all need to be considered.
How much can I borrow with a buy to let mortgage?
This is generally a multiple of the rental income, with an allowance built in for covering your running costs, tax and rental voids. A lender will often require your monthly income to be between 125% and 145% of your monthly interest payments, based on a stressed interest rate of between 4.5% and 5.5%.
The rates vary from lender to lender and depend on your situation and the type of mortgage you are taking. Typically, lower stress rates are used if you take a longer-term fixed rate, such as 5-year fixed rate.
Basic rate tax payers are more likely to be offered a rental cover of 125%, whereas a higher rate taxpayer will require cover of 145%.
Does the property occupancy affect the mortgage I can get?
Your lender will want to know details of the intended occupancy of the property before you get your mortgage, as different types of homes carry different types of risk.
Types of occupancy include:
- Sole occupancy – this is where one household (single person, couple, family) rent a property typically on a 6-12 month tenancy agreement.
- House of multiple occupancy (HMO) – where each bedroom is let to a different individual. This could all be on one tenancy agreement or individual agreements.
- Student lets – this is a variation on an HMO because not all lenders that accept HMO mortgages accept students as tenants.
- Holiday lets – rental income is calculated differently for this type of mortgage and the lender will want to know the low, medium and high season weekly rental rates. This is a very restricted market with only a handful of lenders.
Can I rent out a property I already have a mortgage on?
Yes, but you need to contact your existing lender to get permission. This is known as a consent to let arrangement and is a formal written agreement between you and your mortgage lender.
What’s the difference between regulated and unregulated buy to let mortgages?
Most buy to let mortgages are unregulated. This is because they are deemed an investment purchase and do not need the same degree of protection as a residential mortgage. With a residential mortgage it is important to make sure your personal affordability is correctly assessed.
A good example of where a buy to let mortgage is regulated is where you’re buying a property you intend to rent out to a close family member. This is because it is unlikely you would evict a family member if they stopped paying the rent. The lender will therefore normally consider your personal affordability for this type of mortgage.
There is also another category of buy to let mortgage known as consumer buy to let, which is regulated in the same way as a residential mortgage. This relates to properties that you’ve lived in and now rent out. As the property will be rented to a third party most lenders will calculate the amount they can lend you based on the rent rather than your personal income.
The benefit of a mortgage being regulated is that you get protection from the Financial Conduct Authority.
What type of buy to let mortgage do I need?
There are different buy to let mortgages depending on your circumstances. It’s good to know what you’re looking for so that you secure the right mortgage for you.
First time landlords
Some lenders prefer to work with experienced landlords and don’t want the risk of lending to a first time buyer. With our knowledge of the market, we can point you in the direction of the lenders who will consider giving you a mortgage. Saving you lots of time and energy.
Higher levels of scrutiny apply the more properties you own. Lenders will want to understand the profitability of your portfolio as a whole and not just the property they’re taking a mortgage on.
Limited company buy to lets
This is a growth area, as these are often more tax efficient and have greater flexibility for inheritance planning. We can talk you through the pros and cons of setting up as a limited company to buy a property to let. There are certain requirements you need to meet so speak to us before you go ahead and form a company. Many lenders want this to be a specific company for property management and will not lend to a company trading in other industries.
Let to buy mortgages
If you’re thinking of letting your home to buy your next residence, we can help. If you need to release some equity from the property to help with the deposit for your next home, we can typically raise up to 75% of the property value as a new mortgage.