Buy to Let Mortgages
Buy to Let Mortgages
Austin Davies joins us to talk all about Buy to Let mortgages.
Whether you’re buying for the first time, moving, investing or remortgaging we’ve got it all covered.
Listen to the latest podcast below to find out more!
What is a Buy to Let mortgage and how do they work?
A Buy to Let mortgage is effectively a mortgage on a property that you don’t intend to live in yourself. You’re buying it as an investment and plan to let it out to a tenant in exchange for a monthly rent.
What’s the difference between a Buy to Let mortgage and a normal residential mortgage?
Residential mortgages typically involve capital repayment, which means you’re paying back the loan and interest each month. You can have interest-only residential mortgages but they’re a bit trickier to get.
Meanwhile, Buy to Let mortgages are seen as an investment, so most lenders will allow you to have these on an interest only basis. As a result you will potentially make more profit each month from the rent. The important thing to remember with an interest only mortgage is that you’re not paying any capital back each month. At the end of the mortgage you will need to repay the loan in full.
How is a personal Buy to Let different to a limited company Buy to Let?
There are a few reasons why clients decide to either buy in their own name or as a limited company. With individual ownership you’ll own the property and rent it out in your own name, whereas if you buy under a limited company, it is owned by the company. Most lenders will require you to be the director/main shareholder of that limited company to guarantee the mortgage.
Who can get a Buy to Let mortgage?
Within reason anyone can get a Buy to Let mortgage. Obviously you have to be over the age of 18 and there are a few things to bear in mind. Some lenders for example, will have minimum income requirements, while others don’t.
Typically you need a higher deposit on a Buy to Let mortgage than on a residential mortgage. Deposits for Buy to Lets are typically in the region of 25% although some lenders allow 20%.
First time buyers are a bit of a tricky one as well. It’s easier to find Buy to Let mortgages if you already own a property.
How much can you borrow on a Buy to Let mortgage?
The amount you can borrow completely depends on the rent the property will generate on a monthly basis. Every lender is slightly different but they all have a formula that they use to work out how much they’re willing to lend you.
My rule of thumb is that if it looks like a good investment on paper in terms of purchase price, rent and monthly payments etc. then you should find a lender to support you.
What are the costs involved in purchasing a Buy to Let property?
There are costs both in buying a property and in getting a mortgage. Specific to the property, the main cost is stamp duty. Typically a Buy to Let investment is somebody’s second purchase, which means there is an additional stamp duty land tax of 3% on top of the normal stamp duty rate.
Then you’ve got solicitors’ bills, brokers’ fee and fees for the mortgage as well. There may be a product fee, a valuation fee and some lenders require the shareholders or directors to get what’s called an independent guarantee. This is effectively a solicitor explaining the implications of buying a property through a limited company.
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Is it illegal to rent out a house without a Buy to Let mortgage?
From a mortgage perspective, letting the property out is a breach of the terms and conditions of a residential mortgage. It may not specifically be unlawful but you could face legal issues with your lender.
Is it illegal to live in your own Buy to Let property?
In the same way, this is a breach of mortgage terms and conditions. If your mortgage provider finds out, they will ultimately want the mortgage back and will give you a timeframe to repay the loan.
Should I choose interest only or repayment on a Buy to Let mortgage?
We have clients that do both. Interest only is where you only pay interest back each month and as a result your monthly payment is a lot lower. But on the flip side, you’re not bringing the balance down. So if you borrow £100,000 today you might still owe that in 25 years’ time.
Interest only frees up a lot more capital each month, especially if you want to live off the income or save the money to buy another property. Often when we have a client who wants a mortgage on repayment, once we discuss the options many of them ultimately choose interest only. That’s because most mortgages give you the facility to make an overpayment each month. So you can effectively still treat your interest only deal like a repayment product, but you gain more flexibility.
Let’s say for example, if you didn’t have a tenant for six months and are not making any rent, you might not want to be stuck paying a repayment mortgage. Your interest only deal gives you a lower payment, and you can overpay to pay the mortgage off and you won’t owe anybody any money.
How many Buy to Let properties can I own – is there a limit?
No, there’s no real limit. It depends how much your budget will stretch. Some lenders do have a cap on the number of properties you can own and have mortgages on – but other lenders don’t have a limit at all.
The best thing to do is to talk to your broker about your long-term goals and we can put together a plan. We might use specific lenders, for example. If there’s a lender that has great interest rates but only allows you to have four properties, if you’re planning to buy more than that we can put together a plan. We might put your first four properties with them and future ones with another lender.
Once you have a certain number of properties lenders will see you as a ‘portfolio landlord’ and every lender has a slightly different policy on that. Generally after four properties you might start being treated a little bit differently.
What’s important is the property that you’re looking to buy – does the rent cover the mortgage by the required percentage? Lenders will start looking at the portfolio as a whole in terms of equity and rent.
What other advice do you have on Buy to Let mortgages?
Bear in mind that there are different types of property and different types of tenants. Most Buy to Let mortgages are geared up for a ‘normal’ property like a two bed terraced house. But there are many different types of Buy to Lets. There are houses in multiple occupancy (HMOs), multi-units and more – so it’s always worth chatting through it with your broker.
A good broker will know your local area and possibly have good links with estate agents and letting agents. From an investment perspective, the more information you can get will help you develop a successful Buy to Let business.