Buy to Let Mortgage

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Buy to Let Mortgage

Adam Nunn and Jon Porter talk to us all about the Buy to Let mortgage process.

What is a Buy to Let mortgage and how does it differ from a regular mortgage?

A Buy to Let mortgage is specifically for investment property, as opposed to a residential mortgage which lets you buy property for occupation by yourself and your family.

One of the key differences is that a Buy to Let mortgage is not regulated by the Financial Conduct Authority. You do not benefit from the same consumer protections with regards to the advice you’re being given, that you would when taking out a residential mortgage.
What are the eligibility criteria for obtaining a Buy to Let mortgage? What factors do lenders typically consider when assessing a Buy to Let mortgage application?
Typically, you need to be a homeowner and there are minimum income requirements for some lenders, who want around £25,000.

There’s a minimum age requirement of 21 – but not with every single lender. Some lenders don’t have these restrictions. We would make a recommendation around the lenders available.

How much deposit is usually required for a Buy to Let mortgage?

Generally speaking, you will need to put down a 25% deposit – which is significantly higher than on a residential mortgage at as little as 5%.

Some lenders will consider less than 25%. Certain lenders may do 20% and at times a lender will consider 15% as a deposit. But that can change depending on the appetite for lending and what’s happening in the market.

Often investors come to us with a 25% deposit, ready to buy a certain property. But one of the key factors in determining the deposit needed is a rental stress test. That’s essentially how the lender assesses how much you can borrow.

If you don’t quite fit this rental stress test from the rent received, they may actually lend less. Therefore you have to contribute more than that 25% minimum. That’s where we come in. We can navigate the market to find which lender is best suited for your deposit.

Can you explain the concept of rental coverage and how it affects Buy to Let mortgage applications?

Rental coverage is basically the assessment of your affordability for the mortgage from the rent that you receive. It takes into account current interest rates and also future rate rises, while considering your personal tax position.

If you’re a basic taxpayer or a nil tax payer, you have a higher disposable income because you’ve got less tax to pay from the rent. In comparison, if you’re a higher rate taxpayer, you’ve got additional tax rates to be paid on the rental income you receive.

Are there any specific fees associated with Buy to Let mortgages that borrowers should be aware of?

Yes, and not just specific to mortgages. As with most mortgage applications, you may have to consider a broker fee, a lender’s application fee, a valuation fee, and there might also be what’s called a product fee.

Our advice looks at those fees and whether some of those can be avoided. Does the lender offer a free valuation fee, for example? We’ll obviously consider the best deal for your circumstances.

On a Buy to Let property, the big outlay is additional stamp duty. As of now in January 2025, the current government has increased additional stamp duty from 3% to 5%. That’s on top of the standard stamp duty taxation. So potentially that’s a much bigger outlay than just a couple of months ago.

Another thing to consider is whether you’re using a letting agent, and the costs involved there, and fees for using an accountant.

Should I choose interest only or repayment on a Buy to Let mortgage?

That also depends on the individual circumstances for a person investing in Buy to Let. Generally speaking, most people opt for interest only, because it minimises the monthly mortgage payment and allows you to budget for future expenses. That could include property repairs and taxation, while retaining control of your income from the rental property.

Most people want to treat it like a business and keep outlay as low as possible. But it all depends on where they’re doing the investment and why. Is it to give you income now or income in the future?

Do you want to clear down the mortgage to have retirement income, mortgage-free? Or just to build up savings for future investment properties? You might want to save up that rental income, covering the basic costs but also investing into future properties to build up your portfolio.

What are the implications of recent tax changes on Buy to Let mortgages?

The second property stamp duty is key and that has now increased to 5%. It’s a bigger outlay from the start. You’ve got your deposit, the other associated fees, and now even larger tax to pay to buy that property.

That really reinforces the importance of seeing property as a long-term investment – it will take you longer to replenish those tax funds from the rent you’re receiving.

Over the last decade there have been significant changes to the allowable expenses on Buy to Let mortgages. Historically, you could offset the interest against your rent and therefore have a lower tax liability. It meant the property was more profitable from a disposable income perspective.

But as of now in January 2025, you can potentially only offset around 20% in interest relief. More of the rent you’re receiving is subject to income tax – and therefore it’s become less attractive for landlords to invest in property if they’re seeking an instant return from the rent.

It’s not a simple case of buying property in your personal name, these days. I always stress to clients that they should speak with an accountant first about their rental strategy and their long-term plans. In many cases, depending on your tax position and your strategy, you might be better off buying property via a limited company rather than in your personal names.

Are there any restrictions on using a Buy to Let mortgage for properties in certain areas or for specific tenant types?

Yes. With regards to tenant types, there are different tenancies – short term and longer term tenancies. There are specific lender criteria for those. The standard is short term tenancy agreements with regards to most lenders.

There are also holiday lets like Airbnbs that can be taken into consideration, or Homes in Multiple Occupation (HMOs). These can have certain restrictions with different lenders. Certain developments might not permit Airbnbs or HMOs. There might be restrictions under the titles for the property.

Certain areas might require planning permission or licensing to let the property out for multiple occupants. Understanding what you want to achieve in regards to the tenancy agreement and the area is very important.

Are there any government schemes or support available specifically for Buy to Let investors?

There’s nothing specific to help you buy or invest in property. The Deposit Protection Scheme is something you need to be aware of, and is designed to help protect both the tenants’ deposit and the landlord. You can find information on the government website.

Another important area is that the government is urging landlords to improve the energy performance ratings of properties. There is a target of a C rating and above, so check the details of the target date for that on the government website.

Because of that, there may be grants available to help improve the energy efficiency of your property – whether that’s boiler upgrades, insulation or solar panels. The following links may be useful in this area:

https://www.gov.uk/improve-energy-efficiency

https://www.gov.uk/apply-great-british-insulation-scheme

https://www.gov.uk/apply-boiler-upgrade-scheme

Furthermore, some lenders are now offering incentivised interest rates and products if you have bought a property that’s already an A or B and in some cases a C. But if you are borrowing more money to implement these changes, those products could also be available to you. Perhaps, for example, you plan to take a property from an E rating to an A or a B.

The types of incentives can be slightly lower interest rates or cashback, to contribute towards the cost of upgrading the property.

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What is the importance of property management with Buy to Let mortgages?

The key thing is here looking out for your prospective tenants and avoiding any rental voids. Letting management companies do vetting and referencing of the tenants and deal with any issues at the property – from complaints to boiler problems.

A big thing we’ve noticed over the last two to three years is the importance of regular tenancy reviews and increasing the rent on an annual basis. Many landlords have not increased their rent over the last four to five years and they’re now having to hit their tenants with huge increases. It’s because they’ve fallen behind the market for rental assessment on the mortgage side.

What are the consequences of defaulting on a Buy to Let mortgage? What are the potential risks involved in investing in Buy to Let properties?

Obviously, missed mortgage payments can damage your credit history. If you’ve had a couple of missed payments within the last couple of years and your mortgage is up for review, your lender might not offer you a new deal. You then revert to a much higher interest rate, called the standard variable rate, which no one wants to be on.

You would of course look to find a new lender, but remortgaging involves a new assessment and they will factor in those missed payments or defaults on your mortgage. Your eligibility for a new mortgage can be impacted.

The worst case scenario is repossession of the property. Generally speaking, if someone has missed at least six months’ payments and there’s no sign of them getting out of the mortgage arrears, a lender can decide to repossess the property. This forces a sale to repay the mortgage.

In terms of risks, ultimately a mortgage for a Buy to Let is supposed to be self-financing from the rent you’re receiving. But you do need to budget for rental voids. Hopefully, if you’re using a letting agent, they will help avoid that. If someone’s given notice, they will already be searching for a new tenant for a seamless transition.

But unfortunately, there will be times where you will have a rental void. Some landlords use rent as an income and if they don’t have any other sources, they risk finding themselves in a difficult scenario. We’re reinforcing the importance of retaining savings for those rental void periods so that you don’t end up missing mortgage payments.

Can you explain the process of adding additional properties to an existing Buy to Let portfolio?

When adding or growing your portfolio, lenders will not just consider the individual property for rental coverage. They will also consider the overall risk factor of the whole portfolio.

It’s also partly to do with the area your portfolio is in and the level of saturation. If you want to have several properties in a specific place, that can be restrictive with regard to the lenders.

A lot of my experienced landlords pull out value from their existing properties once they have gone up in value. They take money out and grow the portfolio further. They might have done works to the property and enhanced the valuation. They can then reborrow additional funds for further property investment.

But the more properties you own, the more paperwork and documents you have, so you need better organisation. A broker can help you manage your portfolio by creating spreadsheets and suggesting you streamline bank accounts so whenever you’re increasing your portfolio, it’s easier to review. The assessment when you’re remortgaging becomes a much simpler process.

What steps should a first time Buy to Let investor take before applying for a mortgage?

Because of the changes in investing in property, speak with a tax advisor to understand the pros and cons of the types of investments you’re getting into.

Explore whether it’s better to buy in your personal names or via a limited company. Once you’ve understood that, we can explain your options and how a limited company interest rate compares to a personally owned interest rate.

You can then use those costs to work out the best way to invest in your first property. We can also provide guidance on your choice of investment. You might want to invest in a certain area and if you’ve got 25% of the property value, you might think you can go out and choose any Buy to Let. But that’s not always the case with that rental stress test and potential location restrictions.

We can help you explore other key things, such as whether to work with a letting agent and finding a suitable accountant . We always advise our clients that if they’ve found a property, they should appoint what’s called an ALA letter – a letting agent that is registered with the Association of Residential Letting Agents.

Essentially, you’ve seen a property online and you think it’s going to rent for a certain amount per month, but you need a professional letting agent’s valuation. Then you have a really good understanding of what you’re realistically going to achieve on that property.

You’ve demonstrated how a mortgage broker can help. Have you got anything else you’d like to add?

We’ve just talked about various things that apply to someone seeking to buy a property for income now or future retirement income. But there are also ‘accidental’ landlords where you inherit a property and you need to rent it out, because you don’t want to sell it. There can be different implications there.

Or, perhaps you’re moving abroad, and want to keep hold of the property because you plan to come back in the future. People don’t always set out to be a landlord, but it could still be a good investment. We can help those clients as well.

Obviously, the Buy to Let landscape is changing. Because interest rates have risen, landlords have had their rental income impacted and are looking at new ways of investing in property. It isn’t just Buy to Let mortgages.

A lot of people want to get into flipping property, where you buy a rundown property in cash or with a bridging loan, spend some money, add some value and then remortgage to pull out the money and go again.

Again, we can help you arrange bridging finance. It’s not just mortgages. There are alternative financing options as well, which we can support you with.

YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE MOST Buy to Let MORTGAGES.