When you want to buy a property as an investment with the intention of renting it out, you need a buy-to-let mortgage. Whether you have an extensive portfolio of properties, it’s your first time as a landlord or you’ve become an accidental landlord, there are different options available.
What is a buy-to-let mortgage?
A buy-to-let mortgage is designed specifically for a landlord looking to buy a property to rent out as an investment rather than as somewhere to live. Unless you are renting your property to a close family member, lenders will insist that you take out a buy-to-let mortgage rather than a standard residential mortgage. This is because there is a greater risk to lenders for buy-to-let mortgages and there are some key differences compared with residential mortgages.
How does it work?
Most buy-to-let mortgages are given on an interest-only basis. This means you pay the interest due on your loan each month but don’t make any repayments on the capital. The capital is repaid in full at the end of your mortgage term.
An interest-only mortgage is usually preferred by landlords as it means the monthly outgoings are lower. It’s essential to have a plan in place when your mortgage term comes to an end, though. You may decide to sell the property and repay the loan from the sale proceeds. You may have saved over the mortgage term and be in a position to repay your loan that way. Another option is to refinance, taking out a new loan in its place, preferably with more favourable terms.
Affordability and criteria
The amount you can borrow depends on how much deposit you can pay, the rental income you expect to receive and your personal circumstances.
The deposit requirement
You need to put down at least 20–25% of the property value as a deposit. Just like standard residential mortgages, the more deposit you can pay, the better the rate you can get. More deals with the best rates will become available to you with a deposit of 40% or more.
Lenders will expect your rental income to cover your mortgage payments. Your projected rental income must be at least 25% higher than your mortgage payments but many lenders will expect it to be as much as 45% higher.
You usually need to own your own home to be approved for a buy-to-let mortgage. This can either be outright or with an existing mortgage. It also helps if you have a good credit rating. Some lenders insist that you earn a minimum of £25,000 a year before accepting you for a buy-to-let mortgage.
Lenders also set an upper age limit, which is usually 70 or 75 years old. This means you can’t be older than this age when your mortgage term ends. For example, if you purchase a property in Bexley when you’re 45 and take out a buy-to-let mortgage with a term of 25 years, you will be 70 when the mortgage ends.
What is a portfolio landlord?
When you own four properties or more as a landlord, you are considered to be a portfolio landlord. The affordability checks on portfolio landlords are much stricter than they were a few years ago when the Bank of England introduced new rules. Now, when looking for additional finance, a portfolio landlord has to provide the business models, cash flow projections and mortgage information for each property they own.
Some lenders also set restrictions for portfolio landlords. One of these is the maximum number of properties you can have in your portfolio. The most typical maximum set by lenders is 10 properties. Another restriction can be the loan-to-value ratios across your entire portfolio. For example, a lender may insist that your whole portfolio of properties has a maximum loan-to-value ratio of 65%.
What happens when you become an accidental landlord?
You may not have become a landlord by choice. For example, due to a change in your circumstances, you may have had to rent out your home in Bexleyheath and move into rental accommodation elsewhere. Another possibility is that you may have inherited a property and decided to rent it out.
It’s important in either case to notify the lender when you intend to rent out a property that has an existing owner-occupier mortgage. Your lender may give you a ‘consent to let’ or you may need to switch to a buy-to-let mortgage.
Can you get a buy-to-let mortgage as a first-time buyer?
Yes, this is possible although it may be harder than for other investors. For example, the mortgage deals available are likely to be restricted so you may need to pay a bigger deposit to get access to better deals.
There are also some negative aspects to consider. As the property will be a rental investment rather than a home for you to live in, you won’t benefit from the stamp duty relief that applies to first-time buyers. When you have a buy-to-let mortgage and then decide to buy your own home, you will have to pay the extra stamp duty surcharge. It may also be harder for you to get a new mortgage as the lender may take your existing buy-to-let mortgage debt into account when calculating your affordability for a standard residential mortgage.
There are other factors to consider before deciding if a buy-to-let mortgage is right for you.
The rates and fees are higher than for a standard residential mortgage because it’s a bigger risk for the lender. With a rental property, there may be periods when it is empty or it may be occupied but your tenants stop paying the rent for some reason. Due to this increased risk of you being unable to make your mortgage repayments, the lender will charge you higher rates and fees and you will have to put down a hefty deposit.
Extra costs payable
You need to incorporate other costs into your budget too:
- Valuation fee
- Lender’s fees (including the arrangement fee and a possible booking fee)
- Solicitor’s costs
- Stamp duty
- Landlord and buildings insurance
- The cost of furniture if you decide to rent your property as furnished
- A letting agent’s fees if you appoint one to carry out the property management on your behalf
- Maintenance costs
- Tax on your rental income
Seek advice from an expert
It’s important to get professional advice from your mortgage broker in Kent, London or Edinburgh before applying for a buy-to-let mortgage. He or she can check your financial position, provide expert guidance and source the best deal to suit your circumstances.