Buy to Let Mortgages
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Buy to Let mortgage
All about mortgages for Buy to Let mortgage with Joe Eden.
What is a Buy to Let mortgage and how do they work?
A Buy to Let mortgage is literally a mortgage arranged for you to buy a property as an investment, with the intent of letting it out. That’s it – simple.
What is the difference between a Buy to Let mortgage and a residential mortgage?
A Buy to Let is where you have the intention to rent your property out and have it as part of your portfolio. Residential is where you’re buying a property to live in.
There are two very clear camps of lending. Most Buy to Let mortgages are unregulated, so they don’t offer as much protection as a residential mortgage.
Getting a residential mortgage is more about the income you earn as an individual and that’s how the lender will judge affordability. With Buy to Let it’s more about how much the property would rent for.
So there are two very different underwriting tactics and lending styles. It’s very important that if you choose Buy to Let that you’re going to rent the property out. If you want a residential mortgage you need to live in the property. If that changes, then notify the lender.
How is a personal Buy to Let different to a limited company Buy to Let?
We’ve had quite a few changes in the Buy to Let world over the last few years. A new rule called section 24 came in which is related to tax for landlords owning property in their personal name. This made limited company mortgages more attractive.
The majority of mortgages we do for landlords and property investors now are purchased through a limited company. I’m not saying that’s necessarily right for you – obviously you should get tax advice.
Section 24 came in a few years ago and it makes it harder for you to offset your mortgage interest as an individual property owner. If you’ve had £10,000 come in over a 12 month period from a tenant, but your mortgage cost was £4,000 and your other costs were £1,000, your profit is £5,000. If you’re hit with the section 24 issue, you could be taxed on the full £10,000 as opposed to the £5,000 profit. That’s one of the driving factors that have made limited company mortgages more popular.
The main difference is whether you own the property as an individual, or the limited company owns the rights and the equity to that property. You would be a shareholder of the company, so you’re still directly benefiting from that asset – it’s just not in your personal name.
There are pros and cons to both but a limited company Buy to Let mortgage usually has a higher interest rate. On the flip side, there are typically more tax benefits. So before you start the process, have a chat with a tax advisor to make that decision.
Who can get a Buy to Let mortgage? Can anyone?
Typically anyone over the age of 21 years old who has the deposit and suitable rental affordability can get a mortgage. There will also be personal criteria with each lender.
We do get enquiries from people who are living at home with mum and dad who would rather get an investment property and stay with their parents. That is sometimes tough because some lenders want you to have owned a residential property already, instead of being a First Time Buyer and a First Time Landlord. But it can be done.
How much can I borrow on a Buy to Let mortgage? What deposit do I need?
It depends where you’re buying in the country, and every lender is different. Lenders assess affordability by looking at how much you’re borrowing and then stress test that with a higher interest rate. Then they add another contingency on top to allow for maintenance of the property and void periods. It’s all about how much rent you will get from that particular property. There isn’t one size fits all.
Sometimes buying in a limited company might allow you to borrow a little bit more because you won’t be hit with those section 24 issues.
The minimum deposit is typically 20% but if you can get to 25% you’ll see a difference in interest rate. Putting that extra 5 % into the deposit will make your options a lot wider and save on interest.
How much does a Buy to Let property cost?
Like any other purchase you’ll need a solicitor. Sometimes they will charge you a little bit more if it’s a limited company. You’ve got stamp duty to pay – when you’re buying a Buy to Let there is a 3% surcharge for Buy to Let property investors (as per December 2022). That means whatever the stamp duty rate is on the property you’re buying, you will be charged an extra 3% on top.
There’s also a personal guarantee (PG) that you usually enter into when you’re buying through a limited company. So your company buys the property but lenders will want you to sign a personal guarantee, so if the company goes bust your property is owned and they can come after you. That costs from £150 to £600 to set up. It pays to do your research and look online for local solicitors.
Then there’s a tenant finders fee – you might instruct a managing agent to find you a tenant or do it yourself, but there’ll be a cost to find the tenant either way. Other costs are survey fees from mortgage lenders, application fees that some lenders charge, plus broker fees.
Speak To an Expert
We’ll have an initial five minute chat to address any burning questions, then we’ll set up a Zoom call or a meeting and spend an hour or so going through your affordability and any advice that we can offer at that stage.
That’s entirely free. No matter what type of finance we do, whether it’s residential, Buy to Let, bridging finance, we don’t charge a penny until we physically apply for a product for you.
Is it illegal to rent out a house without a Buy to Let mortgage? Is it illegal to live in your own Buy to Let property?
Yes and yes. There are two very strict camps. Some of it’s down to regulations and some is down to how lenders charge. If it’s a Buy to Let mortgage you cannot live in that property; if It’s a residential mortgage, you cannot rent it out.
There are some ways around that. You might buy a property that you’re living in and your circumstances change so you move out. You could ask the lender for Consent to Let – and obviously it’s down to the lender to decide whether they’re happy for you to do that.
Some lenders will charge an upfront fee to process that Consent to Let, others might charge you a little bit more on the interest rate if they approve. Typically, they would give you a period of maybe a year or two to rent the property out. When that term comes to an end you would reapply for a full Buy to Let loan or move back in.
The other way around is a little bit tougher. If you’ve got a Buy to Let mortgage and want to live in the property, we would usually look to try and remortgage you to a residential mortgage.
Either way, you have to use the property for the intention that you’ve told the lender, or get permission to change. Otherwise you can get in a lot of trouble because you’ll be in breach of your mortgage conditions.
Should I choose Interest-Only or Repayment on a Buy to Let mortgage?
Most of the Buy to Let mortgages we arrange are set up as interest only. If you’re looking for cash flow and you’re building up properties to generate an income, or you’re young and you have another of repayment strategy, interest only can make sense.
With interest only the monthly repayment is lower. Some landlords accumulate three or four properties and at the end of the mortgage term they might sell two of them to repay the capital of the others. Or they might have a lump sum coming that would pay the mortgages off at the end of the term.
But if you do interest only, you’ve got to be aware that if you borrow £100,000 today, you will still owe £100,000 in 20 years’ time. You still need to pay it somehow.
On the flip side you can choose a repayment mortgage. After 25 years you will fully own that property. But you might not have benefited from the income it generated because your monthly payment would be higher. That’s the tradeoff. There’s no right or wrong answer.
We do have a couple of clients who use a slightly different strategy. They set up all the properties on interest only and then make a voluntary overpayment to reduce the mortgage. If a tenant moves out of a property and cash flow’s a bit tighter that month, they can cancel the extra direct debit. If not, then at the end of 20 or 30 years the properties are owned without any debt on them.
Some lenders will charge you an early repayment penalty if you overpay too much, but the typical overpayment allowed is around 10% of your mortgage balance. You can’t just make lump sum payments without careful consideration – it could cost you. But with professional advice that could work well.
How many Buy to Let properties can I own?
We’ve got clients with one property and clients with 80 properties or more. All that happens is when you own more than four properties you become what’s called a ‘portfolio landlord’.
The underwriting changes if you’re a portfolio landlord and a lot of lenders will assess you in a slightly different way. It’s not a huge issue, it’s just a little more labour intensive and we have to provide more documents. Some lenders will ask for mini business plans, for example.
When you own over four properties the other difference is how much certain lenders will lend you. Some lenders won’t accept you if you’ve got more than 10 properties or they’ll only lend against three of them.
Because we’re whole-of-market we will assess the situation for you and find the best lender at that time. You could have 20 properties and 20 mortgages, half of them with one lender and half with another. Some of the mainstream lenders don’t like to be overexposed to too many properties, whereas more specialist lenders will let you have as many properties as you want with up to £10 million of mortgage debt.
Ultimately, there are no limits to how many properties you can have.
What else do we need to know about Buy to Let mortgages?
We’ve covered a lot, but a final thing to mention is that we speak to many clients who think they need a Buy to Let mortgage – but actually they need bridging finance, development funds or commercial lending.
As a firm we do it all. We do bridging, Buy to Let and commercial mortgages. We arrange a lot of investor landlord finance. Many of the team, including myself, are landlords so we’ve gone through the same journey and recognise how frustrating – but rewarding – it can be at times. We’ve helped many clients fund their Buy to Lets and investment properties to grow their portfolios.