Buy to Let Mortgages
This is a popular and specialist market where the help of experienced professional advisors will be invaluable to investors. With many years’ experience in the Buy to Let market we are sure to steer you in the right direction.
Although many of the high street lenders we would recommend for residential mortgages also have Buy To Let products, these are probably not the most suitable for property investors. We hope to provide some basic guidance within this site although we are always pleased to discuss your individual circumstances.
Buying a property as an investment means you won’t be able to fund your purchase with a normal residential mortgage. Instead, you’ll need a specialist Buy To Let mortgage. Whether you’re a first-time landlord, an ‘accidental’ landlord, or an experienced investor there are lots of deals out there, however, the rules around Buy To Let mortgages can be a bit of a minefield.
Why Buy to Let Mortgages?
Property is an excellent long-term investment, with the potential to offer good income and good growth.
Property values are still on the increase in most areas with market estimates forecasting at a small increase. However, fluctuations in the market and the inevitable delays in selling a property make it an unsuitable choice for anyone needing short-term returns, or who might need to access the money tied up in a house quickly.
Many people invest in a Buy To Let property as a pension – the rent each month can be used to supplement your retirement income, or the property can be sold and the proceeds used as a nest-egg.
CHOOSING THE RIGHT BUY TO LET PROPERTY
Location, type and condition of the property are the three most important factors to look at when choosing a Buy To Let property – good research is vital. Is the property close to transport links? Is there parking? Is it close to amenities, such as the shops and schools? Don’t just consider your own preferences – ask local agents for advice on what’s in demand in the area. In some places family homes are in demand, but in others a one-bedroom flat may be more easily let.
Most tenants have high standards these days – modern bathrooms and fitted kitchens are essential in your property. There is a demand for unfurnished property, but showers, fridges and washing machines are now expected as standard. It is worth paying extra for a property in good condition, unless you have the time and resources to refurbish it.
You might choose a fantastic location for your immaculate property but still be unable to let it due to unfavourable market conditions, or just lack of demand. To cover your mortgage payments and make buying to let a successful investment you need to keep your property rented as consistently as possible. Make sure your research covers local demand for rental properties and an assessment of future demand, to be as certain as possible that you will be able to let your property.
WHAT WILL A BUY TO LET MORTGAGE COST?
Mortgage rates are not the same as in the residential market – lenders consider Buy To Lets a greater risk and a semi commercial loan therefore demand a greater return. Their Buy To Let rates can be up to one percentage point higher than residential rates. The deposit required for Buy To Let mortgages is also higher. It is possible to get a mortgage with a 15% deposit however most lenders ask for at least 25% deposit. If you arrange your Buy To Let mortgage through us we charge a £300 fee invoiced on mortgage offer. However, many brokers may charge you a fee of up to 1.5% of your mortgage value. A fee-paying option is also available.
You will have to pay for the survey and legal fees, as with any property purchase.
For a leasehold property there may also be service charges to consider. If you plan to let furnished, you will have to allow for the cost of buying reasonable quality basics – strict fire regulations prevent you using cheap second-hand furniture.
If you plan to use a letting agent, you will have to factor in that cost as well – fees can be between 10% and 20% of the rent.
Don’t forget to add on the cost of insurance – not just for buildings and contents, but also against loss of rental income if the property stands empty, possible damage by tenants or for legal fees if you need to evict a tenant.
Any rise in the value of a rental property, unlike your home, is liable for capital gains tax. Each individual is allowed £12,000 tax-free per annum – so if you buy as a couple your joint allowance would be £24,000 (you should check these allowances as they change each year). This constitutes your total Capital Gains Tax allowance for the tax year and assumes that you have not used up the allowance on other capital gains. The allowance is only available in the year you realise the gain (when you sell the property). Based on 2019/2020 tax year.
However, you will be able to off-set some of the maintenance and running costs against tax.
You should seek professional advice on taxation matters including tax planning.
WHAT ARE THE RISKS OF BUY TO LET MORTGAGE?
As with all investments, the value of a property can go down as well as up – and unforeseen structural problems prove expensive. However, if you pick the right area and are realistic about returns, you can reduce the risks. Having an appropriate survey carried out will help reduce your risk.
Rental income from Buy To Let properties too can vary: if the market is saturated with rental properties, your annual income may remain static, fall or even stop if you are unable to let the property. You need to build leeway into the rent to allow for periods when the property might be empty between lets (it takes on average four weeks to let a property), and to cover maintenance costs. If you are unable to let a property you will still be responsible for paying the mortgage.
The more cautious investor might prefer to borrow less – you should aim for a rental income of over double the monthly mortgage payments.
Many people are put off buying to let by the thought that they will have to spend a lot of time sorting out problems such as broken washing machines or tenants who default on payments. A good agent can take care of everything, from finding tenants and checking references to managing an inventory and dealing with unexpected problems like burst pipes.
Agents can also advise on tenancy agreements. Most lenders require you to have a six-month, Assured Shorthold Tenancy Agreement with your tenants. You may also find it more difficult to arrange finance if you are planning on letting to students or for more irregular tenancy periods, such as “holiday lets” or “company lets”. You may also have difficulties should you be planning on letting to a DWP tenant.
A holisitic approach is being offered by more and more lenders when assessing affordability and this is called Top Slicing. This method takes into account a landlord’s personal income and can include salary and/or pension within the affordability assessment. This can be useful to assist with any shortfall in rental income when lenders are making their decision.
AFFORDABILITY RULES FOR LANDLORDS
In recent years, the Bank of England (BoE) has looked to slow what it considered to be an overheating Buy To Let market by imposing tougher lending restrictions. As a landlord you will need to be prepared for strict affordability testing.
INTEREST COVER RATIOS ON BUY TO LET MORTGAGES
Interest cover ratios (ICRs) are used to calculate how much profit a landlord is likely to make; the ICR is the ratio to which a property’s rental income must cover the landlord’s mortgage payments, tested at a representative interest rate (most banks currently use 5.5%).
The projected rental income must be at least 125% of the mortgage payments, however some lenders may impose higher levels of around 145%.
PORTFOLIO LANDLORDS MORTGAGES
Portfolio landlord stress-testing has now changed, these landlords will now need to show mortgage details, cash flow projections and business models for every property owned when applying for finance. A heavily mortgaged portfolio could mean that you may find it more difficult to obtain extra funds.
Other restrictions, which are set from lender to lender are as follows:
- Some lenders will set a maximum number of properties you’re allowed to have in your portfolio (up to 10 being the most common)
- Different ICRs and representative interest rates depending on how many properties you have may be imposed by some lenders
- Limits on maximum loan-to-value (LTV) ratios across a portfolio (for example, your overall portfolio must be at 65% LTV or lower) or the stipulation that the ICR from every property in your portfolio must be above 100%.
BUYING IN A COMPANY?
The Government have cut mortgage interest tax relief and wear and tear allowance which has resulted in some landlords setting up company structures for their Buy To Let portfolios. Company Buy To Let mortgages are on the rise – in fact the number of company mortgages on the market tripled from 80 to 235 between 2016 and 2018 (Source: Moneyfacts. Accessed September 2019), resulting in more than 250 deals being available to investors. As the interest rates on these deals tend to be significantly higher than those available to individual borrowers, moving to a company structure isn’t the best move for everyone.
Most lenders prefer the company to be set up as an SPV (Single Purpose Vehicle) and have SIC codes (Standard Industrial Classification) specific to the activities of property investing. The company should have one of the following SIC codes set up at incorporation:
- 68100 – Buying and selling of own real estate
- 68209 – Other letting and operating of own or leased real estate
- 68320 – Management of real estate on a fee or contract basis
Most lenders prefer the SPV to be set up with common shareholders and Directors, without a Holding Company, however there are lenders that will allow company group structures and trading companies but this reduces the number of mortgages available.
For further information about topics covered on this page, please click the links below
Still Not Sure?
We can help you by searching the market for buy to let mortgage deals from a comprehensive range, from a database that includes High Street, exclusive products and special deals. Contact Us to find out more.
JUST SOME OF THE LENDERS WE WORK WITH
Shire Financial Services Ltd
Surrey House, 41 High Street,
Newmarket Suffolk CB8 8NA
Registered Company No.
Country of Registration: England
Mon-Fri: 9:30am to 5:30pm
Sat and Evenings: By Appointment
We receive commission from the mortgage lender. Also, depending on mortgage type and complexity we usually charge a fee between £200-500 and for Expatriate mortgages, a fee of £800. Fees are payable upon Mortgage Offer.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
SHIRE FINANCIAL SERVICES LIMITED IS AN APPOINTED REPRESENTATIVE OF SESAME LIMITED WHICH IS AUTHORISED AND REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.
COMMERCIAL MORTGAGES, INCLUDING BUSINESS BUY TO LET, ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY. FOR COMMERCIAL MORTGAGES WE ACT AS INTRODUCERS ONLY.
THE FCA DOES NOT REGULATE ESTATE AGENTS, SURVEYS AND SOME FORMS OF BUY TO LET MORTGAGES.
FOR ESTATE AGENTS AND SURVEYS, WE ACT AS INTRODUCERS ONLY.
THE FCA DOES NOT REGULATE SOLICITORS AND WE ACT AS INTRODUCERS ONLY.
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