Buy to Let Mortgages
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Buy to Let Mortgages
What is a Buy to Let mortgage and how does it differ from a regular mortgage?
A Buy to Let mortgage is used to purchase a property for commercial purposes. A regular mortgage is used for residential property, as a home for the buyer and their family.
Buy to Let mortgages are used to purchase property that will be rented to third parties. These properties are generally bought by landlords as a long-term investment.
What are the eligibility criteria for obtaining a Buy to Let mortgage? What do lenders consider when assessing a Buy to Let mortgage application?
In some cases lenders require a minimum annual income of £25,000 however, others don’t set a minimum income. So it is worth talking to a mortgage broker if you don’t meet income requirements as there may still be options.
The second important factor is the rental income. It needs to be high enough to cover at least 125% of the mortgage repayments. On top of this, the potential landlord needs to have a good credit history – that can improve the chances of the mortgage being approved.
How much deposit is usually required for a Buy to Let mortgage?
It’s much higher than for residential property. In most cases mortgage providers require at least 20% to 25% of the property’s total amount as a deposit. On residential properties the minimum deposit could be as low as 5%.
The reason for this difference is that most mortgage providers consider Buy to Let properties to be riskier than residential properties. That’s because the financial revenue of the landlord depends on the rent being paid by their tenants.
What is rental coverage and how does it affect Buy to let mortgage applications?
The maximum you can borrow is linked to the amount of rental income you expect to receive. Your lender will want to be sure the rental income from your property will cover the mortgage payments, plus a bit extra.
So they usually require the rental income to be 25% to 30% higher than your mortgage payment, to cover extra costs associated with running the property. Those costs include insurance, unoccupied periods, repairs, maintenance, etc.
Are there any specific fees associated with Buy to Let mortgages that borrowers should be aware of?
In addition to the higher deposit and interest rates, landlord’s have other expenses when purchasing a Buy to Let property. Those include maintenance costs, stamp duty and other taxes. Most of those extra expenses don’t apply when buying a residential property.
Should I choose interest only or repayment on a Buy to Let mortgage?
A repayment mortgage is where the buyer is expected to repay both the loan amount and an interest amount via their monthly payments. In the end, your whole debt will be cleared once you make the final payment.
By contrast, an interest only mortgage requires you to pay only the interest owed on a monthly basis. But your financial obligations won’t be over once you complete the last interest payment – you still need to repay the actual loan amount to the mortgage provider.
Repayment deals are more convenient for home owners as they have full ownership of the property once the mortgage duration is complete. But as you can guess, the monthly payments are higher.
Many landlords choose the interest only option for greater flexibility, which can be potentially helpful if the landlord encounters any financial trouble.
What do recent tax changes mean to Buy to Let mortgages?
Changes in recent years include adjustments in mortgage interest relief, changes to Capital Gains Tax and rental income taxation. These can all potentially increase your tax liabilities and affect cash flow and investment return.
Those are all factors to be taken into account when you decide to invest in a Buy to Let property.
Are there any restrictions on using a Buy to Let mortgage for properties in certain areas, or for specific tenant types?
The first restriction that comes to mind is that the owner cannot live in it. We also find that landlords who rent out a House in Multiple Occupation (HMO) to tenants from different households, usually by the room, often require a licence to legally let their properties out.
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Are there any government schemes or support available specifically for Buy to Let investors?
No, there are no government schemes or for Buy to Let investors at the moment.
What impact can property management have on Buy to Let mortgages?
Unlike other investments, owning a Buy to Let property requires active time and management on your part. As a landlord, you can use a property management agent to do the day-to-day work of looking after a tenant.
Property management agents typically charge a percentage of the monthly rent. Additionally, landlords have specific responsibilities such as ensuring gas and electrical appliances are in safe working order.
What are the consequences of defaulting on a Buy to Let mortgage?
Defaulting on a Buy to Let mortgage significantly impacts your credit score and remains on your credit file for six years. Your property can be repossessed by the lender and you may not be able to get a mortgage in the future.
What are the potential risks involved in investing in Buy to Let properties?
There are few potential risks involved in a Buy to Let property. One is vacant property – if you don’t have a tenant, it will impact your rental income and your ability to cover costs.
A second risk is the maintenance and management responsibility – owning property requires you to keep up with repairs, while problematic tenants can add stress and costs.
Another potential risk is market fluctuation. Property values and rent rates can vary, leading to potential loss of income. Finally, there are risks around ever-changing regulations and tax. New rules could affect profitability and compliance requirements.
How would I add additional properties to an existing Buy to Let portfolio?
Purchasing a second or third property is exactly the same process as purchasing the first one. But when purchasing a second property, landlords can borrow against existing rental homes to finance the new property. You can withdraw capital from the original property if it has gained value over time.
What steps should a first time Buy to Let investor take before applying for a mortgage?
First of all, speak with a mortgage advisor to understand your options. Then, do your research around rental income, taxation and the demand for rental properties in the area where you are planning to purchase your property. Then, the next step is finding the property.
How can a mortgage broker help if somebody is looking at Buy to Let properties?
There are three main areas where brokers can really help. The first is expertise: mortgage brokers specialise in Buy to Let mortgages and we understand the rules, criteria and eligibility involved. Second is time-saving. We streamline the process, saving you time and effort.
The last one is a better deal. We have a strong relationship with lenders and can often negotiate better terms than you could achieve on your own.
MOST BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.