Buy To Let Mortgages - The Basics Explained

Trinity Sales & Lettings Wakefield

A buy to let mortgage is different to a residential mortgage in a few significant ways:

  • the interest rates are usually higher
  • the maximum loan to value is generally lower
  • most lenders stipulate that the property can't be let to a member of the owner's family
  • arrangement fees tend to be higher

 

How are borrowing limits calculated?

Calculating by Loan to Value (LTV): As with a residential mortgage, lenders won't lend the full purchase price of the property so the landlord will need to put in some initial capital. Different lenders vary on how much deposit they require, but the standard is a minimum of 25% of the purchase price - so the Loan to Value is 75%. This is much higher than for many residential mortgages - currently first time buyers can put in as little as 5% deposit.

Calculating by rental coverage: Lenders will want to ensure that the amount of rent coming in from the property more than covers the cost of the monthly loan repayments. This is to allow for void periods, maintenance costs, agents fees etc. Typically the rent will need to be at least 125% of the repayments. So if the repayments are £400 monthly the rent will need to be £500. If the property is not tenanted before you buy it, the lender will need to look at comparables of tenanted properties in the area to satisfy themselves that £500 is achievable.


Consent to Let

Ifyour home is the property you want to let out, you'll need to get 'consent to let' from your lender or remortgage switching from a residential to a buy to let deal. Many landlords neglect to do this, in some cases put off by the higher rate of interest they would have to pay, however if the lender finds out they may decide to call in the loan or fine you.

Repayment or Interest only?

Many landlords choose to take out interest only mortgages. The advantages of this are that the monthly repayments are lower so there is more money left over from the rent each month - i.e. the landlord gets more initial cashflow from the property.

The downside is you won't be building up any equity in the property, other than from any capital growth, and you won't ever own it outright or be reducing the amount of debt you owe over the course of the loan. While some landlords feel that the benefits outweigh this, especially taking inflation into account, others will prefer to be building up their assets.



Properties it's hard to get lending on:

An ideal property for a lender is a single dwelling of standard construction, with tenants who are in full time employment. With your typical high street bank it can be more difficult but not impossible to get lending on the following properties or tenancies:

  • Student lets
  • Tenants on benefits, where the benefits go towards the rent
  • HMOs. Houses in Multiple Occupation tend to have a higher turnover of tenants, so more risk of void periods. Each tenant is only liable for their share of the rent as they have a separate tenancy agreement (actually called a licence agreement) which also increases the risk
  • Ex council houses, especially flats
  • Holiday Lets
  • Mixed use properties, where part of the property has a commercial use

You will find lenders who specialise in loans on these types of properties however, so if your bank shies away from it it's often worth having a look around. Talk to a decent broker and get some professional advice before taking out a buy to let mortgage. There are a number we can put you in touch with. Give our office a call on 01924 609 811.

Remember, from April 2017 the rules for offsetting your mortgage interest against any tax due on the rental income will change, so you need to take this into account when choosing your buy to let mortgage. See our blog Tax Changes for Landlords: How Are you Affected







Published on 03 October 2015

Source Trinity Sales Wakefield

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