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Looking for a buy to let mortgage?

  • The buy to let market is forever changing and mortgage lending criteria changes with it.
  • You’ll find our buy to let guide useful whether you are an aspiring or existing portfolio landlord.
  • Our expert advisors are here to guide you and to secure the best buy to let mortgage deal for you.
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Buy to Let

How does buy to let work?

There are many ways to make money from property. But if you are looking to buy a property for the purpose of letting it out, then you will need a buy to let mortgage, unless you are buying the property for cash.

You will have to consider various new aspects of buying a property on your journey to becoming a landlord. To help you along the way, we have put together this intuitive guide that will take you through these aspects and clarify the buy to let process.

Basics Buy to Let costs Jargon Buster Being a landlord Special circumstances

What is a buy to let mortgage?

When you buy a residential (not commercial) property with the plan to rent it out, then you’ll need a buy to let mortgage. You may take out this mortgage in your personal name or in the name of a 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 maximum 12 months.

What is a let to buy mortgage?

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 a 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.

Buy to Let regulatory change

Following the recent taxation and regulatory changes, landlords are seemingly pushed towards considering a buy to let investment as a business rather than a mere hobby to have some side income. For this reason, checking that the figures will add up at the end of the day is very important.

How much can I borrow?

Most lenders assess the potential borrowing based on the rental income. However, their stress testing may also depend on whether

  • you choose a 5yr fixed rate deal or not;
  • you are a basic or higher tax rate payer;
  • you do any capital raising 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 or self-employment. Some lenders also take this personal income into account to check affordability of the buy to let mortgage.

Based on all the points mentioned above, it is really only possible to give suitable buy to let mortgage advice after understanding your individual circumstances and knowing the details of the property you would like to buy.

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

Deposit needed for buy to let

Most lenders require a minimum 25% deposit. There are options for 20% deposit and few lenders even accept 15% for a buy to let mortgage. However, because of the above-mentioned assessment rules, obtaining an 80-85% mortgage is not easy and the costs may be too much to make the purchase worthwhile.

The required deposit may also depend on the property itself. For example, new build and ex-council properties, especially flats, are often restricted to lower borrowing limits than older houses, and the lender could potentially ask for a 30-40% deposit.

There are various buy to let related expressions, which you may or may not already be familiar with. The articles below aim to clarify the meaning and importance of these phrases.

Portfolio landlords

Following regulatory changes on 30 Sep 2017, anyone with 4 or more distinct mortgaged buy to let properties is classed as a portfolio landlord. This categorisation includes:

  • properties with consent to let;
  • properties owned through a limited company;
  • holiday lets and
  • all BTL mortgages owned solely or jointly by the applicant(s).

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

When it comes to underwriting, portfolio landlords normally have to supply additional paperwork. This may include a portfolio information sheet, cash-flow analysis or even a business plan in some cases.

House in multiple occupation (HMO)

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
  • 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.

Although officially an HMO only needs a licence if

  • the property is 3 or more storeys high and
  • have 5 or more tenants live in it.

Having said that, different councils can have different requirements and you may be asked to obtain a licence, even if your property is smaller and/or has fewer tenants.

It is important to clarify whether or not you will need an HMO licence for a property. There are various regulatory and legal requirements, which are only applicable for HMOs. In addition, not all lenders accept HMOs, some lenders 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

Buying a buy to let property is a form of investment, which has its risks and also potential rewards. As with every investment, it is important that you do your due diligence upfront. We have put together this guide to help you prepare for a buy to let property purchase.

Strategy

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?

Location

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 increase in rent hasn’t followed, so the yield is relatively low. In contrast, prices may have stayed relatively low in Scotland, but rents compared to property prices represent a higher percentage.

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.

Regulated buy to let

It is important to know that 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, the borrower takes out a buy to let mortgage to build and run his buy to let portfolio as a business to make a profit.

On the other hand, when someone is an “accidental landlord”, the buy to let mortgage will be deemed as a regulated mortgage contract. Examples include the following scenarios:

  • 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 intend to or can reasonably expect to live in the property at some point in the future

At BlueWing Financials, we handle all applications with the same due diligence. Whether the BTL mortgage is regulated or not, we will ensure that the mortgage deal we recommend is suitable for your circumstances and requirements.

First time buyer first time landlord

Although not generally accepted by lenders, there are some exceptions. A growing pool of lenders are offering buy-to-let mortgages to first time buyer first time landlords.

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

How Can We Help You?

How can we help you?

As independent, whole of market mortgage brokers, we have access to the lenders who offer buy to let mortgages, both for purchase and remortgage transactions. Using our experience and expertise, we can find you the best mortgage deal based on your circumstances and requirements.

Costs of a buy to let mortgage

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

Interest rate and arrangement fee

Interest rates and arrangement fees are typically higher for buy to let mortgages. A residential (homeowner) mortgage typically attracts a £999 arrangement fee, while a buy to let mortgage is normally £1999. There are deals with lower fees, but they are not the norm.

It is also common, especially for 80-85% mortgage deals, to have an arrangement fee, which is 1.5-3.5% of the mortgage. Even in case of a £100,000 mortgage, it would work out as £1500-£3500 fee.

Standard variable rate

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

Additional Stamp Duty Land Tax (SDLT) / Lands and Buildings Transaction Tax (LBTT)

With both the SDLT in England, Wales and Northern Ireland and the LBTT in Scotland being higher for additional properties by 3%, it is another important cost item to consider.

In practical terms, it means that buying a buy to let property for £200,000 will cost an additional £6,000 in tax.

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.

For more info, please refer to the costs section on our “Buying a property” page https://www.bluewingfinancials.co.uk/buying-a-property/

Not a homeowner

You will find that your lender options are limited if you are not a first time buyer, but don’t currently own your home. Most lenders require that you own your residential home with or without a mortgage before buying a BTL property.

This requirement has the same reasons as the restriction behind lending to first time buyers: lenders want to avoid that you move into the property that you take out a buy to let mortgage on.

Buying in the name of a limited company

With the tax rules changing for landlords, it has become a common alternative to buy 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 are becoming more flexible.

However, whether to buy a property in your personal name or in the name of a company has various tax implications. We recommend that you speak to an accountant or tax advisor before making a decision.

You don’t live in the UK

If you live abroad, your options will depend on your scenario:

  • 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. The lender options and whether we can help you or recommend that you speak to certain lenders directly will depend on the details. Give us a call, so we can review your situation and make a recommendation as most appropriate.

Difficult properties

Some properties are more acceptable for mortgage lenders than others. Consequently, the list below aims to help you understand when your mortgage options may be limited due to the property itself.

  • New build flats tend to be sold for more than similar size older flats. Lenders view this as a risk, so often limit the maximum LTV to 50-70% in case of a buy to let mortgage.
  • High-rise flats are either new build flats with the above-mentioned lender concerns or are often ex-local authority flats. If the latter, then it may mean that the area is less desirable or the block is not well-maintained. Either way, lenders often impose a limit of 4-5 stories in a block when it comes to lending on flats.
  • Ex-council flats may also have their entrance from an open gangway, which lenders often deem as unsafe or undesirable. This entrance option is also referred to as “deck access” or “balcony access” and most lenders don’t accept it.
  • Flats may also be above or near a commercial unit. If this commercial unit happens to be a pub, restaurant, take-away, launderette, hair dresser or another 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 are another specialist area that most lenders don’t touch. It is possible to obtain a suitable mortgage for them, but your lender options will be limited.
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While these are perhaps the most common examples of when lender options are limited, there are numerous other details that can influence our mortgage lender choice. For this reason, we always look at the property particulars and ask questions relating to the property before recommending a lender. If there is any risk that the property may not be accepted, this will be discussed with you before an application is made.

Rules and regulations

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)
  • Annual gas safety check
  • Fire safety
  • Electrical appliance safety test

Insurance

Your insurance will have to reflect the fact that the property is rented out, so a normal buildings and contents insurance won’t be suitable. A landlord insurance will have a building and/or contents insurance element, but it will also give you the option for legal assistance, rent guarantee and other buy to let property specific features.

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 don’t have 5 unrelated tenants and the building has 3 or fewer stories.

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.

For further details about the points above and rules around other buy to let aspects, like checking your tenants’ right to rent or how you can evict tenants, visit the official government website at https://www.gov.uk/browse/housing-local-services/landlords

Taxation

The rental income received will be subject to income tax, although certain cost items can be deducted to reduce tax liability. Amongst others, these may include:

  • Mortgage interest payment (not capital repayment element)
  • Ground rent and service charge for flats
  • Letting and management fees
  • Other professional fees, such as accountant and solicitor fees
  • Insurance
  • Repairs and maintenance
The tax rules are changing for landlords, as the government has decided that instead of allowing mortgage interest to be deducted for tax purposes, they would give a 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 in order to ensure that you have the correct information and that your tax affairs are up to date.

Difference between residential and buy to let 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. In contrast, you need a buy to let mortgage when you mortgage a property with the plan to rent it out.

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. This scenario, however, is not accepted by most lenders. If this is your plan, it is important that a suitable lender is chosen 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 personal 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 normally 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

Residential mortgageBuy to let mortgage
Who lives in the propertyThe buyer and/or close familyNot the buyer or close family
Perceived risk by lenderLowerHigher
Acceptable agreement typeLodger agreementTenancy agreement
Consent required for renting outNot for lodger agreement, but if you move out and rent out the property, then yesNo
Basis of assessmentMostly personal circumstances (eg. income, outgoings, age and more)Rental income, the chosen property and personal circumstances
Mortgage payment methodRepayment method is the norm, though Interest only may be acceptedInterest only method is the norm, though Repayment method is accepted

Consent to Let (CTL)

You have 2 mortgage options available when you move home and decide to rent it out rather than sell it. You could

  • either obtain a consent to let from your current lender
  • or remortgage to a buy to let deal with your current lender 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, obtaining a consent to let may only cost you a few hundred pounds administration fee. However, some lenders may increase your current interest rate after granting a consent to let, so check the terms and conditions before signing an agreement.

Yield

A yield is simply the return you make on you buy to let investment. There are various ways to calculate it, so when someone mentions a yield figure, make sure you ask how it was calculated.

Cross Yield

This yield figure is calculated as the gross annual rental income compared to the purchase price or property value. Technically, it is the gross annual rental income represented as a percentage of the purchase price or property value. For example, a monthly rent of £1000 is £12,000 annual rent. If the purchase price is £240,000, then the gross yield is ( £12,000 / £240,000 ) x 100 = 5%.

Cross Yield

This yield figure is calculated as the gross annual rental income compared to the purchase price or property value. Technically, it is the gross annual rental income represented as a percentage of the purchase price or property value. For example, a monthly rent of £1000 is £12,000 annual rent. If the purchase price is £240,000, then the gross yield is ( £12,000 / £240,000 ) x 100 = 5%.

Some people calculate the yield as your rental income compared to your invested funds (deposit and other upfront costs), so make sure you know what you are being quoted.

What is the relevance of the above for a buy to let mortgage? During a mortgage application, the lender typically wants to know what your rental income and costs will be. They may not do the same yield calculation, but will use the same details for assessing affordability.

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