Buy to let
mortgages

If you buy a property to let out to tenants and need finance for it, then you need a buy to let mortgage. You also need a buy to let mortgage when you remortgage an already tenanted property. You may take out a buy to let mortgage in your name or through a limited company.

A buy to let mortgage lender expects you to have a tenancy agreement in place – Assured Shorthold Tenancy (AST) agreement in England and Wales or Short Assured Tenancy (SAT) agreement in Scotland. This agreement should be for 6-36 months, although many lenders prefer it to be for a maximum of 12 months.

Letting out your current home to buy a new home somewhere else requires a let to buy (LTB) mortgage for your current home. It is an alternative to getting consent to let (CTL) from your current lender.

Interestingly, some lenders don’t accept a let to buy scenario as a basis for a buy to let mortgage application. Some lenders have special let to buy deals, while others just offer you the same mortgage deals as for a normal buy to let. For this reason, a whole of market mortgage broker is best suited to sieve through the lenders and find the right lender for your let to buy mortgage.

Who lives in the property?

A residential mortgage is applicable when you buy a property for yourself and/or for your family to live in it. On the other hand, you need a buy to let mortgage if you plan to rent out the property you’re buying.

As an exception, you may buy a property for a family member to live in and pay you rent without needing a buy to let mortgage. Most lenders, however, don’t accept this type of scenario. If this is your plan, then you need to choose a suitable lender to avoid complications and problems later on.

Perceived risk

A tenancy agreement gives various rights to the tenant, which is why landlords often have issues evicting problem tenants. Also, tenants may not look after the property as much as an owner would. For these reasons, lenders perceive lending for buy to let purposes as higher risk than lending to owner-occupiers. This is reflected in buy to let mortgage deals having higher borrowing rates than owner-occupier deals.

Tenancy agreement vs lodger agreement

A residential mortgage for your own home doesn’t allow you to rent it out under a tenancy agreement. However, if your circumstances have changed and you are looking to move out of your home and rent it out, your lender may give you a consent to let and may also increase your interest rate.

It is important to note, though, that lodgers with a lodger agreement are normally accepted without any consent or rate increase. This is useful when you are looking to rent out a spare room in your home.

Basis of assessment

A residential mortgage is mostly assessed based on your mortgage affordability, i.e. your income and outgoings. A buy to let mortgage, on the other hand, is primarily dependent on the rental income. Having said that, most lenders will either have a minimum income requirement and/or assess the affordability using your income and outgoings even in case of a buy to let mortgage.

Mortgage payment method

Lenders normally expect a residential mortgage to be on repayment basis (i.e. your monthly payments reduce your mortgage balance). In case of a buy to let mortgage, however, the interest only method is the norm (i.e. you only pay interest on the loan, the balance doesn’t reduce).

While it is not usually an issue to have a buy to let mortgage on a repayment basis, taking a residential mortgage on interest only basis is very much subject to terms and conditions, if the lender allows it at all.

Summary of residential and buy to let mortgage differences

Most lenders assess your potential borrowing for a buy to let mortgage based on the rental income.

Nonetheless, their stress testing may also depend on whether:

• you choose a 5yr fixed rate deal or not;
• you pay basic or higher tax rate;
• you are looking to borrow more than your current mortgage balance during a remortgage or not;
• the property is an HMO or not;
• you are a portfolio landlord or not and
• the purchase is in the name of a person or a limited company

Most lenders have a minimum income requirement of £20k-£30k from employment, self-employment or pension. Some lenders also take this personal income into account when testing your affordability of a buy to let mortgage.

Because of all the points mentioned above, we can only tell you how much you can borrow after we understand your circumstances and know the details of the property you would like to buy.

In the meantime, as a guide, check whether the expected rent covers the mortgage payment by 145% if you assume a 5.5% buy to let mortgage interest rate. If it doesn’t, your lender and deal options will be limited.

Most lenders require a minimum 25% deposit for a buy to let mortgage. Though some lenders accept a 20% deposit and a minority few are even happy with just 15%. However, because of the various rules lenders attach to buy to let mortgages, getting an 80-85% mortgage is not easy.

The property itself may also influence how much deposit you’ll need. For example, lenders often limit the mortgage to 60-70% (instead of the standard 75%) in case of a new build or ex-council property, especially for flats.

Building insurance

If you buy a house, then building insurance will be mandatory to ensure that in case the structure is damaged (e.g. by fire, flood or movement), the insurance will cover at least the mortgage amount.

Nothing else is compulsory, but of course, it makes sense to cover costly unexpected events.

Contents insurance

Contents insurance can pay for replacing your personal belongings if someone burgles your home, there is fire, you accidentally drop your new flat screen TV…and the list goes on.

Landlord insurance

Landlord insurance protects you as a landlord from risks associated with your rental property. It usually includes buildings and contents insurance, but can also include rental-property specific covers such as protection against loss of rent, and tenant default. It can also cover legal fees and compensation for damage or injury to the tenant due to the property.

Life insurance

Life insurance is a one-off payment if you were to die during the mortgage term, so the insurance can settle your mortgage. This would allow your family to stay in the property without worrying about mortgage payments at an already stressful time.

Critical illness cover

Critical illness cover would give you a lump-sum if you had a serious illness like cancer, heart attack or stroke as well as dozens of other conditions. This payment may or may not settle the mortgage, but it can help pay for treatment, let you take time off work while recovering or alter your home, if necessary.

Income protection

Income protection is designed to give you a monthly income for some time in case you can’t work due to an accident or a long term illness. This covers mental health issues as well.

Of course, all the insurances come with terms and conditions, optional features and your medical history can influence your options.

To find the right insurance cover that fits within your budget, speak to our team today. We can compare the whole market, find the most suitable cover and apply on your behalf free of charge.

Lenders perceive a buy to let purchase as higher risk compared to someone buying a home for themselves. This is reflected in the costs.

Interest rate and arrangement fee

These are typically higher for buy to let mortgages. A residential (homeowner) mortgage typically has a £999 arrangement fee, while a buy to let mortgage is normally £1999 or a percentage of the mortgage amount. There are deals with lower fees, but those normally have higher interest rates.

Standard variable rate

When your initial deal finishes and you don’t switch to a new deal immediately, you revert to the lender’s own standard variable rate (SVR). Lenders often have a higher standard variable rate for buy to let mortgages than for residential mortgages.

Additional Stamp Duty Land Tax/ Lands and Buildings Transaction Tax / Land Transaction Tax

When you own more than one property, you will likely pay a 3% additional property tax upon purchase. For example, buying a buy to let property for £200,000 will cost an additional £6,000 in tax if the purchase results in you owning more than one property.

Other costs

Certain other costs are normally the same as for a residential mortgage. These include:

• valuation fee
• money transfer fee
• solicitor fee
• search fees

Following regulatory changes on 30 Sep 2017, if you have 4 or more mortgaged buy to let properties, then you are a portfolio landlord. This categorisation includes:

• properties with consent to let;
• properties owned through a limited company;
• holiday lets and
• all BTL properties owned solely or jointly by you.

Not all lenders offer mortgages to portfolio landlords, and those who do may apply a different stress test when assessing rental income.

Portfolio landlords normally also have to supply additional paperwork when applying for a buy to let mortgage. This may include a portfolio information sheet, cash-flow analysis or even a business plan in some cases.

The official definition is that a property is an HMO, if

• at least 3 tenants live there who are not part of the same household and
• the kitchen, bathroom and toilet facilities are shared.

A household may consist of a single person, a couple or members of the same family who live together.

It is important that you clarify with the local authority whether or not you will need an HMO licence for a property and if you do, what the council’s requirements are.

There are also various regulatory and legal requirements that are only applicable to HMOs. Additionally, not all lenders accept HMOs, and some lenders who do, offer different interest rates or apply different rental income stress test calculation.

You can find more information on the official HMO government website here: https://www.gov.uk/renting-out-a-property/houses-in-multiple-occupation-hmo

You have two mortgage options available when you move home and decide to rent out your old home instead of selling it. You could

• either obtain a consent to let from your current lender
• or remortgage to a buy to let mortgage deal from your current or a different lender.

If you are locked into a deal with an early repayment charge (i.e. penalty), then it may be too costly to remortgage to a new buy to let deal.

In contrast, getting a consent to let may only cost you a few hundred pounds administration fee. Nonetheless, some lenders may decide to increase your current interest rate after granting you a consent to let, so check the terms and conditions before signing an agreement.

To use a familiar phrase, there is no “one size fits all” strategy and “get rich quick” schemes may be tempting, but they also carry risks.

It may help you focus and decide how you wish to proceed if you consider the answers to the questions below:

• How long do you want to keep the property? Is it for long-term investment or shorter term turnaround after adding value?
• What kind of tenants would you like? Professional people, students or strike a deal with the local council for long-term secure tenancies?
• Would you keep things simple with a single household tenancy (e.g. one person or a couple) or are you ready to take on a house in multiple occupation (HMO)?
• Do you want to maximise the rental profit (i.e. take an interest only mortgage to keep the mortgage payments low) or reduce the mortgage balance first and enjoy rental income later?
• Would you prefer an arms-length investment, for example by buying new-built flats, which come with a 10-year warranty and use a letting agent to manage the tenancy? Or do you have the time and the knowledge to maintain an older house and manage the tenants yourself?

Either way, we can arrange the best mortgage deal for you, so once you know what your strategy is, we can get you the finance for it.

Some people prefer to invest near where they live, while others are quite happy to have a buy to let property further afield, where they can get a better yield (return on investment).

Generally, a more expensive property will likely not have a proportionately higher rental income, although it may appreciate more in value.

For example, property prices in London may have shot up, but the rent hasn’t increased much, so the yield (return on investment) is relatively low. In contrast, prices may have stayed relatively low in certain other areas of the country, but the rents compared to property prices show a higher return.

Dependent on your target market, you may look for a location close to a university, hospital, transport links or good schools. Or may work with a council to identify suitable locations for their tenants.

Alternatively, you may look for up and coming areas, where you are likely to see relatively quick growth in property values. Whichever way you decide, the location has to support your strategy.

Being a landlord comes with various obligations as well, so make sure that you are clear about them.

Property maintenance

You need to maintain the property regularly and arrange all the necessary checks:

• Energy Performance Certificate (EPC) before you rent out the property
• Annual gas safety check
• Fire safety to comply with regulations and HMO licencing requirements
• Regular electrical appliance safety test

Insurance

Landlord insurance protects you as a landlord from risks associated with your rental property. It usually includes buildings and contents insurance, but can also include rental-property specific covers such as protection against loss of rent, and tenant default. It can also cover legal fees and compensation for damage or injury to the tenant due to the property.

HMO licence

You may need an HMO licence if the property is occupied by multiple unrelated tenants. Check your situation with the local council, as they may impose this licence requirement, even if you have less than 5 unrelated tenants living in the property.

Deposit schemes

You must place the deposit into a tenancy deposit protection (TDP) scheme if you rent out a property in England and Wales on an assured shorthold tenancy (AST) agreement. There are separate TDP schemes in Scotland and Northern Ireland, so dependent on where you invest, make sure that you check the rules or engage a local letting agent to help you.

The rental income you receive will be subject to income tax, although there are certain costs you can claim as expenses to reduce your tax liability. Here are some of the costs you can deduct from your taxable rental income:

• Letting and management fees
• Other professional fees, such as accountant and solicitor fees
• Insurance
• Repairs and maintenance

The tax rules have recently changed for landlords, as the government has decided that instead of allowing landlords to claim mortgage interest as an expense, they would give them tax relief. This change is currently being phased in and will complete during the 2020/2021 tax year.

We recommend that you speak to an accountant or tax advisor to make sure that you have the correct accounts and that your tax affairs are up to date.

The Financial Conduct Authority (FCA) does not regulate most buy to let mortgages. These are the buy to let transactions which are intended to be wholly or predominantly for business purposes. In other words, if you take out a buy to let mortgage to build and run your buy to let portfolio as a business to make a profit, then your mortgage is not regulated by the FCA.

On the other hand, if you are an “accidental landlord”, then your buy to let mortgage will be regulated by the FCA. For example:

• Let to Buy (you move homes and rent out your old home);
• you rent out a property to a close family member (parents, grandparents, children, grandchildren or siblings);
• you expect to live in the property in the future.

At BlueWing Financials, we handle all applications with the same due diligence. Whether your buy to let mortgage is regulated or not, we will make sure that the mortgage deal we recommend is the best suited for your circumstances.

Although not generally accepted by lenders, some do offer buy to let mortgages to first time buyer first time landlords, and some lenders will ask that you apply together with someone who already owns a property.

You will typically need a minimum 25% deposit and the lender will want to feel confident that you intend to rent out the property instead of moving in yourself.

If you are not a first time buyer and you don’t currently own your home, then you’re a non-homeowner. Most lenders require that you own your residential home with or without a mortgage before applying for a buy to let mortgage.

Lenders want to minimise the risk that you move into the property that you buy with a buy to let mortgage. Consequently, some lenders require that you own other buy to let properties, even if you don’t own the property where you live.

With the government changing tax rules for landlords, a common alternative is buying in the name of a limited company.

The limited company may be specifically set up to buy, renovate, rent out and sell properties; or it may be your existing limited company that you use for a different business. If the company is set up for your property business, it is called a Special Purpose Vehicle (SPV) company.

As this way of borrowing continues to grow in popularity, we see more lenders offering BTL mortgage deals for companies. Rates are also reducing and lending criteria is becoming more flexible.

However, buying a property as an individual or through a limited company has various tax implications. We recommend that you speak to an accountant or tax advisor before making a decision.

If you live abroad, your options will depend on your particular circumstances:

• Are you a British or a foreign citizen?
• Have you ever lived in the UK?
• If you have lived in the UK before, do you intend to return in the foreseeable future?
• Do you currently own a property in the UK?
• If you own a property in the UK, is it on a residential or buy to let mortgage at the moment?
• If you receive rent in the UK, is it paid into a UK bank account and do you pay tax on it in the UK?
• Are you employed or self-employed?
• Do you get paid in the UK and do you pay tax in the UK?
• Do you have current credit history in the UK?

There are no right or wrong answers.

Your mortgage options and whether we can help you will depend on the details. Give us a call, so we can review your situation and make the most appropriate recommendation.

Lenders don’t tend to like certain properties, so your lender options may be limited in the following cases:

• New build flats – sometimes they are sold for more than similar size older flats. Lenders view this as a risk, so often limit the maximum loan to value to 50-70% in case of a buy to let mortgage.
• High-rise flats – they are either new build flats with the above-mentioned lender concerns or are often ex-local authority flats. If the latter, then lenders tend to think that the area is less desirable or the block is not well-maintained. Either way, they often only accept 4-5 storeys in a block when it comes to lending on flats.
• Ex-council flats – aside from the above-mentioned points, some blocks have an open corridor, where the flat entrance doors open from. This is referred to as “balcony access” or “deck access” and lenders don’t normally like them due to safety concerns.
• Flats above or near a commercial unit – if this commercial unit happens to be a pub, restaurant, takeaway, launderette, hairdresser or any type of business likely to emit smell or noise, lenders often refuse to lend.
• Flats with short lease term remaining (less than 85 years) or with an absent freeholder or without a management company set up to manage the block of flats will also have an impact on the lender choice.
• Holiday homes and holiday lets – they are another specialist area that most lenders don’t touch. It’s possible to get a mortgage, but your lender options will be limited.

Give us a call if you plan to invest in the property types mentioned above.
We’ll work with you to make sure you secure the most suitable deal based on your circumstances and the property.