Buy to Let Mortgages
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Buy to Let Mortgages
Gary Boakes talks us through Buy to Let mortgages.
What is a Buy to Let mortgage and how do they work?
A Buy to Let mortgage is where an individual or a company buys a property to rent out. It’s usually seen as an investment strategy, for people that want to use property as part of an investment portfolio.
It’s fairly simple – you get a mortgage on a property, you then let that property out. Hopefully that property’s mortgage will be paid by the rent and either you gain an income or you wait for the property value to go up in price in the future. That’s the main way that people make money out of Buy to Let.
What’s the difference between a Buy to Let mortgage and a residential mortgage?
In essence, it’s who can live in it. A Buy to Let property is for somebody else to live in. You can’t live there yourself – unlike a residential property, which is for you and your family. You own and live in that property.
Another difference on a Buy to Let property is that you can get limited company Buy to Let or a personal Buy to Let. That’s a decision to make up front – whether to buy as an individual or set up a limited company to buy the property. With a limited company it can be a little more technical and there are more criteria to meet.
Anyone looking to arrange a limited company Buy to Let mortgage really needs to speak to a broker or an accountant to look at their specific circumstances.
Who can get a Buy to Let mortgage? Can anybody?
Anybody can, even First Time Buyers or First Time Landlords can get them. It’s a little bit more tricky if you’re a First Time Buyer, as lenders prefer you to own a residential property already when buying a rental property. But we do have lenders that can look at that option for you.
You can have a Buy to Let with no required income, although some lenders require a minimum level of income. The key thing on a Buy to Let mortgage is the deposit. But to answer the question, almost anyone can Buy to Let.
How much can you borrow on a Buy to Let mortgage and what sort of deposit do I need?
Generally it’s a minimum of 25% deposit, but some lenders can do 20%. There are often more criteria involved with a lower deposit, so again, speak to us to go through that.
How much you can borrow is dependent on the property you buy and the rent it will make for you. In that regard it’s very different to a residential mortgage. With the majority of Buy to Lets, lending is based on the rent. There will be a calculation and a ‘stress test’ put on that rent to confirm how much you can borrow.
One or two lenders will consider Buy to Let looking at your baseline income, but this is a little bit more specialised than general Buy to Let. With ‘top slicing’ you can base the mortgage on a bit of both – you can use the rent for the property, but if it’s not enough for the mortgage you want, potentially we can include an element of your income in the application to boost the lending.
But the main way Buy to Let works is that if you want to borrow a set amount, the rent has to reach a certain level.
What are the costs involved with Buy to Let?
It’s no different generally from residential property. You need a solicitor for Buy to Let, so there’s a cost for that. Then there is stamp duty, and as it stands [podcast recorded in May 2023] you will pay an extra 3% on top for a second property. But if you’re a first time landlord and this is your first property, you wouldn’t have to pay that extra stamp duty levy.
We’re not tax experts, but we can guide you on what your stamp duty would be for a property. Then it’s about whether a valuation survey is enough or if you prefer to pay for an extra survey.
Arrangement fees are usually a little bit higher on Buy to Let products than residential ones. You can either pay them up front or add them to the mortgage depending on the circumstances. So, apart from stamp duty, the costs are generally the same as for a residential purchase.
How we can help you
No matter what stage in life you’re at, our expertise will help guide you along the way. We’ll take the time to understand you, your aspirations in life and what you want to achieve in the short, medium and long term. Our team of experts are on hand to help people all over Wiltshire and the surrounding areas, from our Salisbury office.
We want to give you peace of mind, knowing that no matter what happens, you’ll enjoy a financially secure future.
Is it illegal to rent out a house without a Buy to Let mortgage? Is it illegal to live in your own Buy to Let property?
The easy answer is yes, both things are illegal. As we said earlier, a residential mortgage is for a property you live in. With Buy to Let it is expected that you will rent that property out. Living in your own Buy to Let property means you are breaking the rules for that mortgage.
However, life does change and if you have a residential property, you may wish to let it out at a later stage. You can request Consent to Let from your residential mortgage lender in certain circumstances.
It can also depend on the type of job you’re in. As we explained on an earlier podcast, people in the military are able to rent out their residential property on day one because of the type of the job they do. They are likely to move into that property at a later stage.
So technically the answer to the question is yes, but it does depend on the circumstances. There could be leeway in some situations.
Should I choose interest only or repayment on a Buy to Let mortgage?
It depends on your circumstances, really. Most people choose interest only, because it means that your money is liquid. It’s not tied up in the property. Generally people who do interest only will put money aside in a bank account to pay for maintenance costs or tax bills.
If you don’t spend it all, you might have money available to invest in another Buy to Let property at a later stage.
On a repayment basis, all the money is in the house. So to get that money out you will either need a further advance or a remortgage to buy additional properties. It’s a little bit more complicated and time consuming, especially if you need that money straight away.
Again, the right approach will depend on your circumstances and your long term plans for the property. But the majority of the clients we deal with usually generally choose interest- only mortgages.
How many Buy to Let properties can I own? Is there a limit?
There are no limits on how many you can own, but the rules do change. You become a portfolio landlord once you own four properties, and the way lenders look at you will then be a bit different. Not only will they check the affordability of your new purchase, they will also look at your portfolio to stress test the affordability more widely.
Generally once people start getting to three or four properties there’s a lot more talk around limited companies, especially for higher taxpayers. But again, it all depends on your circumstances.
How can a mortgage broker help someone who is looking into Buy to Let mortgages?
A Buy to Let mortgage is a specialist product, so generally you can only get these through brokers. We’re here to look at your circumstances because these mortgages are quite complex in terms of how affordability is worked out.
Do you have to have an income? Is there a minimum income? Are you a first-time landlord? There are many different things involved in Buy to Let. Doing it on your own is a real minefield, so see a broker.
We simplify that process for you and signpost you to other relevant parties that you may not be aware of. We’ll put you in touch with an accountant to discuss the tax benefits of limited companies, and we’ll help you get advice on whether Buy to Let is the right investment strategy for you.
We look at the overall picture on why you’re looking at Buy to Let. We can help you get objective advice. This is a business transaction – it’s not a property you’re going to live in, so you need to consider the best location to get the best yield and the best return.
What other advice do you have for people looking at Buy to Let?
A lot of people initially go to estate agents – but it’s actually best to go to a letting agent. They specialise in letting properties out, so they will tell you which areas are good, which types of property are popular and what yields to expect.
You might be considering one property, but you could come out of the letting agents thinking that you should be buying a different type in a different area.
I always recommend a period of preparation and not rushing into it. Ultimately it is an investment. You want to make money from this, so take your time. We can help you and guide you through that process, with hints and tips along the way.
Your property may be repossessed if you do not keep up with your mortgage repayments.
The Financial Conduct Authority does not regulate most Buy to Let Mortgages.