Buy to Let Mortgages: 3 Questions Answered

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Buy to Let mortgages are designed specifically for landlords who buy property to rent out. You will be familiar with many of the terms that apply to them already as they are similar in many ways to residential mortgages, but there are differences. It’s also important to understand that except for some very specific circumstances, a conventional residential mortgage cannot be used to finance a buy to let property

First of all, the question of residential mortgages. You may be going away for a prolonged period on business, moving temporarily, or struggling financially. You may wish to rent your home out for a short period. In this case, you would seek “Consent to Let” from your mortgage provider. Each lender is different, so it’s important to have that conversation directly with them to make sure that you are not breaching the terms of your mortgage. So always take advice from your lender on this one.

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Q1. Will I meet the eligibility criteria for Buy to Let Mortgages?

There a number of criteria that lenders expect borrowers to meet, but these are very different from the requirements for a conventional residential mortgage.

  • You want to finance the purchase of property for rental purposes
  • You already own your own home either with or without a mortgage
  • You have a good credit record, and you aren’t stretched on other borrowings like credit cards
  • You have an income – different lenders require you to have different levels of income.
  • You understand the risks associated with property investment and can afford to take those risks
  • You will be below lenders’ age limits when you apply for your mortgage. Many lenders have an upper limit of 70-75
  • You will need to demonstrate what the rental income will be, but not necessarily your own income.

Q2. What are Buy to Let Mortgages For?

There are several reasons why you would take on this type of mortgage, but it’s important to remember that buy to let mortgages have very specific uses, and using them for something else can leave you in breach of a lender’s mortgage terms.

  • For purchasing houses or flats to rent out to generate an income. This could be a single property, or to add to an existing portfolio. 
  • To convert an existing mortgage into a buy to let where you are planning to rent the property out.
  • Commercial buy to let mortgages would be used to purchase commercial property like industrial units, offices, and shops for rental purposes.

Q3. What is a Buy to Let Mortgage?

This type of mortgage is similar to residential mortgages, but there are some key differences.

  • The fees and interest rates tend to be higher
  • The minimum deposit is usually 25% of the value of the property, but this can vary.
  • Usually, buy-to-let mortgages are interest-only with the capital amount repayable at the end of the term. 
  • They are not regulated by the FCA (Financial Conduct Authority). The only exception to this is where you rent a property to a close family member, in which case the same eligibility and affordability rules apply as they do for a residential mortgage. These are often called consumer buy to let mortgages
  • Lenders will usually look for a rental yield 25-30% higher than the mortgage payments
  • What you are able to borrow will typically be linked to the expected rental yield
  • Most of the big banks and some specialist lenders provide buy to let mortgages.

There are a number of other considerations before taking out a buy to let mortgage, and these should be considered as part of your business proposition too. Firstly, it’s a good idea to have a contingency plan. There are likely to be times when your rental property is vacant and you need sufficient funds not only to keep up your mortgage payments but find your property as well. If you need to replace a boiler, for example, can you finance it? You may have a difficult tenant and need to cover periods where they aren’t paying the rent. The perfect example is the Covid pandemic, where many tenants have struggled to meet part or all of their rent payments and landlords have had to cover the losses for a prolonged period. How would you cover such eventualities?

Mostly buy to let mortgages are interest-only, so the capital needs to be repaid at the end of the term. Relying on selling the property could present you with a problem if property values have fallen and you can’t meet the mortgage repayment. Remember that when you sell your sale could be subject to Capital Gains Tax, so a sum will need to be deducted for this.

Finally, it’s always a good idea to seek professional advice from a mortgage adviser who will be able to take you through all of the detailed information that you need to understand and help you source the most suitable buy to let mortgage options for your particular circumstances. Contact us 

Liddle Perrett Ltd is an appointed representative of PRIMIS Mortgage Network. PRIMIS Mortgage Network is a trading style of First Complete Ltd which is authorised and regulated by the Financial Conduct Authority.