Buy to Let Mortgage Guide
What You Need to Know
- A Buy-to-Let mortgage is a mortgage designed for a property which you are buying and intend to rent out rather than live in yourself.
- They are usually more expensive than a regular mortgage both in interest rates and deposits as lenders see them as being a bigger risk.
- To get a mortgage you will have to have minimum income of £25,000, own your own property already, and be able to demonstrate that you will get a rental income of at least 125% of the amount you want to borrow.
- If you don’ have rental income you will still have to repay your mortgage so it is important to build a financial safety net to cover for this possibility as well as any unexpected maintenance costs you might incur.
- A good Buy-to-Let investment can net you a 5%-10% return annually, but be aware that property prices can go down as well as up, so selling your property is not always guaranteed to pay off your income.
- Always research both your property and your mortgage before committing to minimise the risks you are taking. Use comparison sites and even a specialist Buy-to-Let Mortgage broker to ensure you are getting the best deal.
What is a Buy-to-Let Mortgage?
A Buy-to-Let mortgage is exactly what the name suggests. It is a mortgage designed for a property which you are buying and intend to rent out rather than live in yourself.
They usually work in much the same way as a conventional mortgage, although interest rates tend to be between 1% and 2% higher, and they usually also require a larger deposit, typically 25% or above. The reason that they are higher is because a Buy-to-Let mortgage is considered to be a higher risk for a lender than a regular mortgage.
To qualify for a regular mortgage, you have to prove you have a regular income, and this income is then expected to cover your monthly repayments. Buy if you are letting out your property, you are likely to be relying on the rental income you are making to cover the cost of your mortgage.
Rental income is considered less reliable than regular salaried income, as there is always a risk that you have an extended period without tenants and therefore without rental income. In these circumstances there is a greater risk of you defaulting on your mortgage.
If you are tempted to rent your house out whilst on a regular mortgage to save on money, beware. If your lender finds out they could change the conditions of your mortgage, change the rate you are on, or even refuse to continue lending to you at all.
To apply for a Buy-to-Let mortgage you will usually have to already have a mortgage on your own home (or own it outright), and there is almost always a minimum income requirement required as well. This is typically around 25%.
It is also important to note that Buy-to-Let mortgages are not regulated by the Financial Conduct Authority which oversees regular mortgages. However should you be borrowing from a lender who has FCA authorisation (and it is advisable to always to this) they will still be expected to treat you in the same way as they would people taking out a regular mortgage. You can also make a complaint to the Financial Ombudsman, if you feel you have not been treated fairly.
How much can I borrow on a Buy-to-Let Mortgage?
The amount that you can borrow on a Buy-to-Let Mortgage will depend on the rental income the property is able to generate. This means that the type of property being bought and the location of the property will be big factors.
The rental income you can generate is usually expected to be between 25% and 30% higher than the amount of money you will be allowed to repay each month. So if you can achieve a rental income of £1,000 a month, you will be able to get a mortgage with monthly repayments of between £700 and £750 a month depending on which lender you go with. This means that for a 25 year mortgage you could borrow between £210,000 and £225,000.
If you are unsure what type of rental income your property could achieve, the best way to get an idea is to invite some local letting agents around to value the property, or look at the prices similar properties are being rented for in the area.
When taking out the mortgage, be sure to remember the various extra charges and fees that will be attached to the mortgage. You should also be aware that when renting a property out you will also be responsible for the cost of any maintenance that needs to be done on the property as well, so be sure to factor that into your calculations and make sure you can afford the mortgage you are going for. If you fail to keep up with your repayments you could risk losing your house.
What happens if I don’t have any tenants?
The reason that interest payments and deposits on Buy-to-Let mortgages are higher than regular mortgages is because of the risk of the property not being let out and the landlord therefore being able to keep up with repayments.
Because the monthly mortgage repayments will have to be met regardless of whether the property is being rented out or not.
It is likely that you will find that there are periods, or voids as they usually referred to, when there is no tenants in the property. Hopefully these will just be periods of a few days or a couple of weeks between one set of tenants leaving and another moving in.
But nevertheless it is advisable to ensure that you have a financial safety net in place to cover the costs of your Buy-to-Let mortgage should the worst happen. This should also be in place to cover any expensive maintenance bills that might crop up as well. A sum of at least three or four month’s mortgage repayments should be the minimum you look to out aside.
Beware Moving Property Prices:
A lot of people who take out Buy-to-Let mortgages can get sucked into the trap of assuming that if you need to repay the mortgage, you can simply sell the house. It is important to remember that property prices can go down as well as up.
If the value of your property increases then you will be fine. If you choose to sell your property you will be able to repay your mortgage in full, and you should have a lump sum of money left over afterwards as well (although you should remember that you will have to pay Capital Gains Tax on any profits that you make).
However if property prices decline, you will still be required to make up any shortfall in the difference between the value of your house and the amount of money owing on the mortgage. This situation is known as negative equity.
Equally, if you sign up for a variable rate mortgage, be aware that if interest rates increase, the amount that you are repayment every month could increase as well.
Is it worth taking this risk?
Whether or not getting a Buy-to-Let mortgage is too risky for you or not is an individual decision. But on the whole, as long as you do your research into both the property you are buying, and the mortgage you are taking out, you should be ok.
Indeed the right Buy-to-Let investment can give you an annual return of between 5% and 10% a year on your investment from a combination of rental yield (the amount of money left from the rent once the mortgage has been paid) and equity building in the property. This amount is significantly higher than any interest rates that can currently be found on other savings products in the UK at the moment.
In some parts of the UK, particularly London and the South East, property prices have been climbing steadily for a number of years now and there is no sign of this trend changing, even if prices have been slowing down in the past few months. But that is not to say that they won’t decline in the future, so even in these parts of the country it is important to find the right mortgage for you.
Where to find the right Buy-to-Let Mortgage?
It is important to do your research thoroughly before committing to any financial product, but none more so than a Buy-to-Let mortgage. Take a look at the available rates, and the conditions that they come attached with, and calculate what you can afford, and what the right deal is for you.
Most comparison sites will offer a range of products for you to look at, but it might also be advisable, especially if this is your first time getting a Buy-to-Let mortgage seeking the advice of a specialist Buy-to-Let Mortgage Broker. They are likely to charge a fee, but their knowledge and contacts could potentially save you far more than you have to pay them.
- Read our top tips for getting accepted for a mortgage.
- Check out our guide to the UKs top mortgage lenders and brokers.