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A buy to let mortgage is a product designed for properties that are to be rented out to tenants.
Unlike residential mortgages, not all buy to let mortgages are regulated by the Financial Conduct Authority (FCA).
Although this isn’t an extensive list, here’s an idea of some things you’ll want to consider before taking out a buy to let mortgage.
Similarly to a residential mortgage, a larger deposit will generally attract lower interest rates.
Unlike residential mortgages, the minimum deposit requirement will be higher for a buy to let mortgage – usually 15%, although a deposit of 20% to 25% will open up the door to a larger selection of lenders.
Some lenders have minimum income requirements (for example £25,000).
Generally lenders may require that you own your own residence.
Some also have minimum & maximum age limits.
Although these are typical requirements, these won’t apply to all lenders.
The lender will be assessing the property itself to ensure it’s in a ‘lettable condition’, as the property must be ready to rent as soon as you complete.
If you’re looking for a property to renovate before renting, you’ll need a more commercial loan.
You’ll need to decide what type of tenancy will be in place.
For example, if you’re looking to rent each room individually, you’ll need to look into a licence for houses in multiple occupation (HMO), which will require a specific mortgage product.
Before investing in buy to lets, speak with a qualified tax adviser to make sure you understand the tax implications of owning a buy to let.
This will range from additional stamp duty, to capital gains tax, to how you’ll be taxed on the rental income (depending on the structure of the buy to let).
If you arrange your buy to let mortgage on an interest only basis, you won’t be repaying the debt on a monthly basis.
You’ll want to consider how you’ll repay the loan amount at the end of the mortgage term.
This may be to sell your investment property to pay off the mortgage or you may have a separate investment plan to have this covered.
If the sale of the property is your plan, just beware that property markets can crash, so you’ll want to ensure you have enough equity in your buy to let.
Have you considered investing through a limited company?
You’ll want to weigh up the benefits and downsides of both routes before investing, including the tax implications of each option.
It might be worth having a look at our limited company buy to let mortgage page for more information.
We’d always recommend seeking separate independent advice from a qualified tax advisor before proceeding with any property investment plans.
Calculating borrowing power for a buy to let mortgage is more complex than a residential mortgage, as the lending is mainly based on the rental income achievable.
This is among other factors, such as the rate of tax you pay.
Lenders will usually want to see that the rental income covers the monthly mortgage repayments by 125% for a lower rate taxpayer or 145% for a higher rate taxpayer, at an assumed rate of 5.5% (although this varies).
Generally speaking, the higher the rental income, the larger the available loan size will be.
The simple answer is no.
A buy to let mortgage is arranged for a property that you’re looking to rent to tenants.
However, it may be an option to change your buy to let mortgage to a residential mortgage, where you’ll then be able to live in the property.
With a standard buy to let mortgage, most lenders will insist that you have an Assured Shorthold Tenancy (AST) agreement in place for one household.
If you’re looking to rent your property out to 3 or more people, forming more than 1 household, your property will be classed as a House in Multiple Occupancy (HMO) – for this you’ll need a HMO mortgage.
If you’re looking to rent your property as a holiday let or through AirBnb you’ll need to make sure your lender will allow this, as many do not. There are lenders out there that have specific mortgage products for this.
It’s important to make sure you have the right mortgage product, as you don’t want to find yourself in a breach of your contract, which could result in you needing to repay the loan in full.
There’ll be some standard documents that you’ll want to gather, such as a proof of ID, proof of address, proof of income, proof of deposit and a credit report.
You’ll also need the property details (e.g. anticipated rental income), or an idea of the property ranges you’re looking at with an estimation of anticipated rental income.
The lender may require a detailed summary of your portfolio along with a business plan, cash flow projections & asset/liability statements, where applicable.
Whether you’re looking for your first buy to let or looking to add to your portfolio, we’re here to help you to secure your property investment in the most stress free way possible.
We’ll be by your side throughout & we’d love to continue to help with your investments in the future too.
Access your credit report
As a mortgage is secured against your home or property, it may be repossessed if you do not keep up the mortgage repayments. Think carefully before securing any other debts against your home or property. The Financial Conduct Authority does not regulate commercial buy to lets and some forms of commercial mortgages. You may have to pay an early repayment charge to your existing lender if you re-mortgage
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Rose Hill Financial Services Ltd is authorised and regulated by the Financial Conduct Authority. You can find us on the Financial Services Register https://register.fca.org.uk/ under reference 912303. Registered office address: 1 Bell Street, 2nd Floor, London, England, NW1 5BY. Registered in England and Wales. Company registration no: 11997519.
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