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Buy to Let Mortgage
Diarmuid talks to us about Buy to Let mortgages.What is a Buy to Let mortgage and how does it differ from a regular mortgage?
For anyone new to mortgages, a Buy to Let is a mortgage on a residential property that you don’t live in yourself and rent out to somebody else. There are strict regulations around owners living in these properties, particularly if they do so without a Buy to Let mortgage or permission from the lender.
The minimum deposit amounts also differ between Buy to Let and standard residential mortgages.
What are the eligibility criteria for obtaining a Buy to Let mortgage? What factors do lenders typically consider when assessing a Buy to Let mortgage application?
Most lenders will insist that you already own a residential property before they will consider eligibility for a Buy to Let – although there are one or two notable exceptions to this.
Some lenders will require you to have a minimum income, for example £25,000. This isn’t necessarily used to calculate the affordability – that’s mostly based on the rental yield that the Buy to Let property will receive. But again, there’s exceptions to that too.
For instance, Birmingham Midshires and other lenders have no minimum income requirements for Buy to Let, as long as the rental income meets the lender’s affordability criteria.
How much deposit is usually required for a Buy to Let mortgage?
25% is the standard minimum deposit for a Buy to Let mortgage. Some lenders in England accept less, possibly 20%, but here in Northern Ireland no lenders will accept any less than 25% – and that goes back for as long as I can remember.
I did have a conversation recently with a lender that’s considering reducing its minimum deposit for Buy to Let, so we’ll see what happens there.
What is rental coverage and how does it affect Buy to Let mortgage applications?
Traditionally, affordability for Buy to Let mortgages was similar to residential mortgages, being based on your income. But in recent years, they’ve used rental coverage instead.
It’s a calculation used by lenders to determine whether or not the maximum rental income that a Buy to Let property could yield is enough for mortgage purposes. Most Buy to Let lenders require the maximum rental coverage be between 125% and 140% on an interest only mortgage, for it to be safe to lend.
There are calculators we could go through with our clients to see if the rental yield is enough. You could also go on to lenders’ websites. Birmingham Midshires and Bank of Ireland both have a calculator to show you if it’s going to be doable or not.
Are there any specific fees associated with Buy to Let mortgages that borrowers should be aware of?
Most of the fees you’ll come across for Buy to Let will be the same as a standard residential mortgage. These include valuation fees, arrangement fees from the lender, mortgage broker fees and land registry searches.
If the property is going to be rented as furnished, obviously there’s a further cost there for anyone looking at becoming a landlord.
Should I choose interest only or repayments on a Buy to Let mortgage?
That depends entirely on your long-term strategy and goal in purchasing the property. If you’re thinking of building a portfolio to use as a retirement income, far in the future, it makes sense to take a repayment mortgage. You use the rental income to repay the capital and interest over the longer period, especially during times when interest rates are lower.
But a lot of people may be thinking more short term. As the property market is growing they want to make a faster profit on any increase in value, whilst keeping monthly payments lower.
Obviously, if you’re only paying the interest, your monthly payments are going to be lower. That means you’re going to receive more income on a monthly basis. When rates are higher, this might be a better option for you.
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What are the implications of recent tax changes on Buy to Let mortgages?
There were tax changes a few years ago, which hit landlords with Buy to Let mortgages pretty hard. Previously, they could use their mortgage interest payments to reduce their taxable income from Buy to Let, but the government did away with that.
Now, even if the mortgage payments are higher than the rental income, landlords still have to pay income tax on the full amount they receive.
There is also an additional stamp duty levy for owning multiple Buy to Let properties, which has put a lot of people off taking out Buy to Let mortgages in recent years [podcast recorded in August 2024].
Are there any restrictions on using a Buy to Let mortgage for properties in certain areas or for specific tenant types?
There are restrictions on certain properties, such as houses of multiple occupancy (HMOs), in terms of the lenders available for these. Landlords will need a HMO licence in place before being legally allowed to let the property out – so people should obviously bear this in mind.
What’s the importance of property management with Buy to Let mortgages?
When properties are let out, they need to be managed in terms of rental agreements, tenancy deposit schemes and maintenance. Many landlords won’t have time or the knowledge to manage these things themselves, especially if they’re stepping into this arena for the first time.
They would need to employ the services of a management company or an estate agent – which costs money. The Buy to Let mortgage will still need to be paid each month, regardless of any of these factors or problems that might arise.
What are the consequences of defaulting on a Buy to Let mortgage? What are the potential risks involved in investing in Buy to Let properties?
It’s much the same as defaulting on a standard residential mortgage – you’ll suffer the same consequences. That could mean a reduction to your credit score, for example, which could potentially prevent you from getting a mortgage in future.
Other risks as a Buy to Let property owner, include getting the right tenants in place. We’ve all seen those TV programmes and heard horror stories about ‘tenants from hell’, who cost landlords a lot of money.
There could also be gaps in the tenancy, where one tenant moves out and you’re waiting on another one moving in. That could sometimes take a few months. If renovations are needed, again there will be a period of time where the mortgage needs to be paid but there’s no rent coming in, so that needs to be considered too.
How do landlords add additional properties to an existing Buy to Let portfolio?
As soon as you have more than three properties, you become a ‘portfolio landlord’. If you need more Buy to Let mortgages to add to your portfolio, that restricts the number of lenders available.
The ones that do lend usually have higher interest rates, so it’s important to take these things into consideration before becoming a portfolio landlord.
What steps should a first time Buy to Let investor take before applying for a mortgage? How can a mortgage broker help here?
It’s important that you speak to an experienced mortgage broker before embarking on this journey, for all the reasons we’ve covered in this podcast.
A broker could help a first time investor in finding the right lender to fit their needs, their income and their employment type. We could also provide general guidance on the restrictions that mortgages could have and the implications of making the wrong decision.
It’s important to seek advice to set out on the correct path for your future goals.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
MOST BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.
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