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Finding the right buy to let mortgage
When recommending the most suitable buy to let mortgage I explore all avenues and present various options to you. We’re looking at much more than just the interest rate to help ensure you make a profitable investment. Some of the key factors I consider include:
Loan to Value
Lenders require a bigger deposit for buy to let mortgages compared to standard residential mortgages, usually 25% or more. It’s important to strike a balance between how much deposit you need to invest upfront versus how the loan to value could impact your borrowing power and the interest rate. Typically, the higher the loan to value the higher the interest rate because there is greater risk for the lender.
Rental Coverage
The rental income must exceed the mortgage payments by a certain margin to satisfy the lender’s requirements, usually 125 to 145% of the mortgage payments. The higher the rental coverage the more profitable your investment and the more likely you are to secure a mortgage offer.
Fees
Lenders usually charge a fee upfront for arranging the mortgage. It can be a flat fee or a percentage of the loan. Borrowers tend to add this to the balance of their loan which affects the overall cost – both the monthly payments and the interest.
These are just some of the factors we’ll assess when finding the most suitable and affordable buy to let mortgage for your needs. You can rest assured that I take a holistic and thorough approach to every application.
The Financial Conduct Authority does not regulate some forms of Buy to Lets. Your property may be repossessed if you do not keep up repayments on your mortgage.
Buy to let mortgage FAQs
How does a buy to let mortgage work?
Most buy to let mortgages are interest-only, this means your monthly payments will only cover the interest and at the end of the mortgage term you will still owe the amount you initially borrowed. For example, if you borrow £250,000 and add on an arrangement fee of £1,999 you will still owe £251,999 at the end of the term, which is typically 25 years. With that in mind, you need to think carefully about how you will repay the loan before you take out an interest-only buy to let mortgage.
How much deposit do you need for a buy to let mortgage?
The standard deposit for a buy to let mortgage is 25% of the purchase price, however each lender has a different set of criteria. Some lenders may accept a smaller deposit of 20% and others may require a bigger deposit. This depends on your financial circumstances and the rental yield. If the rental coverage is too low the lender might require a bigger deposit of, say 40%, to lower the monthly payments and increase the rental coverage. However, if this happens you might reconsider whether the property is a worthwhile and sensible buy to let investment.
How much income do you need for a buy to let mortgage?
Affordability for a buy to let mortgage is calculated differently to affordability for a standard residential mortgage. Lenders will primarily look at the rental income to determine how much you can borrow. Some lenders have a minimum income requirement of £25,000 per year, although this is secondary to the rental income.
Is there a maximum number of buy to let mortgages you can have?
There is no legal limit on the number of buy to let mortgages you can have in the UK. However, the more mortgages you have the more difficult it becomes to secure further finance. Once you have 4 buy to let mortgages you are considered to have a portfolio. Lenders carry out additional risk assessments on portfolio landlords to ensure affordability. They may require a bigger deposit and a higher rental coverage to reduce risk. If you have a portfolio of 10 or more properties you may find that you have fewer lenders to choose from as they limit the number of properties they finance for each borrower.
Can first time buyers get a buy to let mortgage?
Yes, first time buyers can apply for a buy to let mortgage. However, your options will be limited as there are fewer lenders who will offer you a mortgage. Lenders prefer applicants who already own a property because it demonstrates experience in managing a mortgage and property ownership. The lenders that are willing to offer you a buy to let mortgage may have more strict criteria than usual depending on your financial position.
Can you switch a residential mortgage to a buy to let mortgage?
Yes, it’s possible to switch from a residential mortgage to a buy to let mortgage. If you want to rent out a property you currently live in without switching to a buy to let mortgage you can ask your lender for consent to let. By getting consent to let you could avoid early repayment charges. You must get permission from your lender before letting your property otherwise you’ll breach your contract and could face penalties. Once your fixed term mortgage is up for renewal you can switch to a buy to let mortgage.
Do you have to pay tax on rental income?
Yes, rental income is subject to income tax. The amount of tax you’ll pay depends on your tax bracket. You can deduct allowable expenses such as letting agent fees, maintenance costs and mortgage interest relief. Farnham Finance cannot advise on tax matters, you will need to speak to an accountant to find out more about tax on rental income.
Your home/property may be repossessed if you do not keep up repayments on your mortgage.
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Meet Robert Lewis-Crosby
Robert is an experienced mortgage adviser specialising
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fees. Speak to Robert today about your mortgage
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The Financial Conduct Authority does not regulate some forms of Buy to Lets. Your property may be repossessed if you do not keep up repayments on your mortgage.