Buy-to-let Mortgages – A Beginner’s Guide

If you want to purchase a property to rent out rather than live in, you won’t be able to finance your purchase with a standard residential mortgage.

In that case, you may turn to a specialist buy-to-let mortgage (BTL).

Buy-to-let mortgages are expressly designed for people looking to become landlords or add to their existing property portfolios.

“Accidental landlords” – homeowners who would like to rent out their homes – may also need to apply for a BTL mortgage.

What's a Buy-to-let Mortgage?

This is a mortgage designed to let you buy a property.

But unlike an ordinary mortgage:

  • You do NOT live on the property. Rather, you rent it out to others.
  • The amount you can borrow will depend on the rent you expect to collect from the property.
  • The down payment and interest rates tend to be bigger than a residential mortgage.

You could earn money from a buy-to-let if rental rates go up in the local area or if your property goes up in value.

As an investment, buy-to-let is long term, ties up large amounts of money and comes with some risks.

So, if you’re going to invest in a BTL property, your decision must make commercial sense.

Why are Buy-to-let Mortgages Expensive?

The reason is simple – lenders consider getting rent from tenants to be more of a risk than homeowners making their own monthly mortgage payments.

When calculating how much you can borrow, lenders also take into account extras like agent fees, maintenance costs and landlord’s insurance.

The result is a higher minimum deposit of 20-25 percent and higher interest rates and fees compared to residential mortgages.

How Much Can You Borrow With a BTL Mortgage?

Most lenders base your mortgage amount on how much income you will earn from renting out the property (your Income Coverage Ratio).

Mortgage lenders typically require your rental income to be at least 125 percent of your monthly mortgage interest/payments. Some lenders may request a higher minimum rental income (140-145 percent) if you’re a higher rate taxpayer.

To calculate your monthly buy-to-let mortgage payment, lenders will use a managed rate as opposed to your actual mortgage product rate. Often, this is 5.5 percent.

Some lenders use a “stress rate.” This method factors your income and existing debt to determine if you could afford a higher interest rate.

You’ll also need to meet the lender’s minimum salary requirements. Most lenders have a blanket £25k minimum income.

How to Apply for a BTL Mortgage

Before picking a lender for your buy-to-let property, pay a visit to get a feel for the area and the property.

Once you’ve chosen a lender, you can make your application online, visit a physical branch or apply by phone if you’d prefer to talk to someone first.

If you have a good credit history, you can apply as an individual or jointly with a partner. Some lenders allow up to three friends.

You may be asked to provide supporting documents with details of your salary, employment status, current financial commitments and loans (including existing mortgages).

Much like for all mortgage applications, your lender will then assess your financial situation.

Should I Consult a Mortgage Broker?

A buy-to-let mortgage broker will remove a lot of hassle and paperwork involved in getting a mortgage and help you find a lender with less restrictive rules.

A broker will also help you access exclusive products and rates that are not available to the general public.

Before they can give you advice, mortgage brokers are regulated by the FCA and must pass specific qualifications.

What is the Best Buy-to-let Mortgage?

There’s no one-size-fits-all answer to this question.

The best BTL mortgage for you will depend on the unique circumstances of your property and yourself.

Some lenders will not be willing to finance properties of uncommon construction types, while others may have restrictions about flats or local authority properties above commercial premises.

Others will not accept multiple properties or homes with multiple occupants.

The best way to find the right BTL mortgage is to do your own extensive study or speak to a mortgage broker.

Can I Convert a Traditional Property to BTL?

Definitely!

You can substitute your existing mortgage with a new BTL mortgage if you plan to move out of your home and rent it out.

It would be best to inform your mortgage lender about your plans to avoid the risk of invalidating your mortgage.

Are There Other Costs Involved?

Expect to pay:

  • Stamp Duty Land Tax (SDLT)
  • Broker’s fee
  • Valuation fee
  • Independent survey fee
  • Insurance
  • Conveyancing and legal fees

Conclusion

Conclusion

At the expiration of your interest-only mortgage deal, you’ll still be expected to pay off the property’s purchase price at the time you bought it.

Most landlords do this by selling the property. This is where most people make their profit.

If, however, the property’s current value is lower than when you bought it, you’ll be expected to cover the balance with your own money or refinance.

If you fail to keep up repayments on your mortgage, your property may be repossessed.

The information provided in this document is an opinion and is for informational purposes only. It is not intended to be and should not be construed as investment advice. Seek a licensed professional if you are in need of investment or financial guidance.

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