Privately owned buy to let properties are primarily financial investments. They can be very successful and come with many advantages such as the potential to gain on investment and make a profit, as well as tax benefits.
Whether you’re a first time buy to let borrower or a seasoned one, it can still be a challenge because there is potential risk involved.
It’s important when you purchase this type of mortgage that it won’t be your permanent residence and that you intend to let it out to prospective tenants. Any buy to let mortgage will be officially registered on the property for the purposes of renting it out.
It is also important you don’t confuse buy-to-let mortgages with let-to-buy. This article aims to provide you with a brief guide on buy-to-let mortgages
What is buy to let?
It’s basically what it says on the tin. You purchase a property with the intention of becoming a landlord and letting it out to prospective tenants. It is not your permanent residential property.
What is a buy to let mortgage?
Whilst a buy to let mortgage works much like a conventional one there are key differences in the application process.
Although every lender has their own criteria, you will generally be assessed primarily on the viability of your investment. Lenders want to know the potential profitability of the property i.e. rental income.
As well as its potential, when considering your application lenders may be looking for:
- Higher deposits at 15% or above
- Any non-standard features that may require a specialist lender
- Whether you own any existing properties
- Income and if it’s from secured employment
- Rental income estimations
- Credit history
Remember buy-to-let mortgages are a business investment and should be a carefully considered one.
What is the difference between a conventional and buy to let mortgage?
From a legal standpoint both types of mortgage essentially work in the same way, whether you opt to get a repayment or interest only mortgage.
A repayment mortgage means you pay back the interest on the loan and the capital every month until the end of your agreement, by which time you will own the property outright. This type of mortgage is an option that portfolio landlords who already have several properties under their belt take.
An interest only mortgage, which is the most popular amongst buy to let borrowers, means that you only pay the interest on the capital every month. It is most popular amongst buy to let borrowers as the monthly payments are lower and at the end of the term the borrower can sell the property in order to pay off the capital or re-invest it.
However, the application process differs to that of a conventional mortgage. Lenders generally have different criteria to meet than a conventional mortgage.
Whilst personal income is the main assessment in a residential mortgage, a buy to let mortgage will be assessed primarily on the viability of your investment i.e. the profitability of the property. A lot of lenders will look for the potential of 125% to 145% rental coverage.
What are the advantages compared to the disadvantages of choosing to do buy to let?
Disadvantages you are likely to see will include the risk of an empty property and increased costs when compared to a residential. In addition to property maintenance, letting agent fees and insurances, you are likely to see these extra costs in the form of increased stamp duty, rates and set up fees.
However, the potential advantages could outweigh this. Advantages of having a buy to let include:
- Potential to gain on investment – as the general trend is for property prices to increase, should you choose to sell the property you could stand to make a profit.
- There is a strong rental market – this means that finding tenants shouldn’t be too difficult
- Tax benefits – some of your running costs can be reclaimed on a self-assessment return if you are footing the bill yourself. It could include council tax, agent fees and repair costs.
How do I get a buy to let mortgage?
As we’ve said, the criteria for a buy to let mortgage differs to that of a residential. It is important to therefore to understand what a lender may be looking for (although every lender will have their own criteria).
To start, the minimum deposit requirements are higher than that of a residential mortgage. This is because the level of risk on the lender is different. You will be expected to have a minimum 15% deposit though in some cases you may be required to have 25%.
In addition to credit checks and assessing the viability of the potential investment, when applying with a lender they will more than likely also look at:
- Your age – some lenders have maximum and minimum age caps i.e. over 21 and below 75.
- Type of property – if your potential property has any non-standard features such as a thatched roof you may require a specialist lender.
- Whether you own any existing properties – some lenders expect you to own another property and have owned it for a certain length of time.
- Your income – it’s likely that there will be a minimum requirement and for it to come from secure employment, though there are lenders who will lend if you are self-employed or have non-standard income. Rental income can also be factored in.
If you think a buy to let is right for you it’s worth shopping around. As these types of mortgages come with higher costs you’ll want to look for a good overall deal and not just the best rates. It’s also a good idea to look for offers on legal costs and valuations.
It’s important that you look at the tax advice from HMRC or speak to an accountant. A buy to let is a business investment and you will be making an income on it therefore it is important you follow the most up to date guidelines.
A mortgage advisor could also be helpful if you are considering buy to let. We know that helpful and insightful advice from a specialist can help with any questions you have.
Mortgage advisors help borrowers understand their options and will also match them to buy to let lenders based on their personal circumstances. A whole of market broker will also have access to high street lenders right through to specialist lenders.
Contact us at Online Mortgage Guru on 0345 3669799 or email us via firstname.lastname@example.org and we will put you in touch with a suitable specialist to handle your enquiry.