What is a buy to let mortgage?

A Buy to Let Mortgage is a type of mortgage that is specifically designed to enable someone to own a property with the intention of letting the property out, as opposed to living in the property.

Understanding UK Buy to Let Mortgages

Buy to Let mortgages differ from Residential mortgages as the lender will expect the property to be let after completion and do not allow you to live in the property at any time. Usually the lender would expect the property to be let on a Assured Shorthold Tenancy (AST), but some may allow other tenancy types subject to criteria.

They are underwritten differently to a residential mortgage and the lenders will use a different set of criteria to determine whether you are eligible for this type of mortgage.

Buy to Let mortgage affordability is sometimes based on what the property generates as opposed to what the applicant or client earns on a monthly or annual basis. Most lenders will still want to see evidence that an income is there to cover any rental voids etc, but it doesn’t always influence what the borrowing amount will be.

Assessing Your Suitability for UK Buy to Let

There are many things to consider when looking to invest in a Buy to Let property. The first is to do research on demand in a specific area. For instance is it somewhere that has reasonable demand for people to rent, would a rural 7 bedroom mansion have much demand compared to a 3 bed property in a residential area? And also, what is the difference in price!

Other things to consider are whether you want to purchase in personal name or via a Limited Company. It’s important to get tax advice as to whether it’s a sensible investment to put in your personal name as income tax will be paid on the full rental income, whereas owning in a Ltd Co is more tax efficient.

Doing research on what a certain type of property is likely to generate is imperative not only for mortgage purposes (as the rent needs to service the mortgage payment at a certain percentage) but also from a return on investment (ROI) perspective to make sure you’re generating a sound investment.

Once the initial property research is done, it’s important to speak with a mortgage broker to ensure that the mortgage is affordable and will meet what criteria is set out by the lender. At Connely Roberts Mortgage Services, we can carry out upfront research prior to making an offer on a property to ensure the figures work from a lending aspect.

Talk to us about affordability research today

Advantages of UK BTL investments

All BTL investors will have different aspirations / investment plans. Some clients will be looking to provide an additional monthly / annual income with the profit they will be making from the rental income.*

Other investors will be looking at the property appreciation over the longer term, potentially to fund a retirement pot / pension. Although property is normally deemed a fairly safe investment in the UK, it’s important to be aware that this is never guaranteed and a drop in property prices could affect the amount of equity you hold in a property.

Purchasing a property in a Limited Company could be a tax efficient way of investing your money as you cannot pay income tax on the gross rental income. Recent cuts to mortgage interest tax relief and the 3% buy to let stamp duty surcharge have also been responsible for encouraging some landlords to set up company structures for their buy-to-let property portfolios.
Also, because the rental property is owned under a company structure, it will not form part of your personal ‘estate’ and therefore wouldn’t be subject to inheritance tax.

*Be aware this could have an adverse impact on your personal tax rate, it’s recommended to obtain tax advice as this is not something we offer.

Challenges and risks specific to the UK market

It’s important to be aware of potential risks and challenges you may when looking to invest in a Buy to Let property.

One of the largest risks in Buy to Let properties is the fact that the property may be empty for a period and it’s important to be prepared for that by having a ‘back-up’ if this was to occur for a period of time. The mortgage will still need to be repaid and you need to be comfortable you can afford the monthly payments should any rental voids occur. If the property was in an area with high demand for rental properties, then there may be security in knowing that if there were periods of time that the property stood empty, they would likely not be for significant amounts of time.

It’s also important to be aware of the costs associated with purchasing and owning a Buy to Let property. Any maintenance and repairs needed on the property are usually paid by the landlord (you!), so it’s worth being prepared for additional costs.

Also it’s important to note that there are additional costs involved when purchasing a Buy to Let property, the main one being potential additional stamp duty (depending on purchase price etc).

Another risk is any future changes in interest rates, which some landlords would have seen over the past 12-18 months in particular. Any future changes in interest rates, could impact the monthly repayments due back to the lender, which could impact the profitability of the property. It’s important to seek professional mortgage advice to ensure that the mortgage product you’re securing is best suited to your needs and future plans.

 

Mortgage Requirements for UK Buy to Let Properties

Depending on a particular lender, the lending criteria can vary. General rules apply across the market with most lenders offering a maximum Loan to Value of 75%, meaning a 25% deposit is required. There are lenders who may offer a higher loan to value such as 80% or 85%, however the number of lenders reduces significantly, interest rates will also be higher, and the lending criteria is likely to be harsher. Other general criteria will apply such as credit scoring and income checks with some lenders.
Some lenders may also stipulate a minimum annual salary that applicants must meet. Whilst others will take into consideration any outstanding lending commitments, such as a landlord’s personal financial situation which will include any mortgage repayments on their own home.

Typically, lenders will apply stress tests also known as Interest Coverage Ratio (ICR) to determine whether a Buy to Let mortgage will be achievable or not. An ICR refers to the ratio to which a property’s rental income must meet and adequately cover the mortgage payments made by the landlord.

The ICR required can vary depending on lender, your personal tax rate, or your personal circumstances.

The Role of UK Mortgage Brokers:

  • Access to a diverse range of lenders and products, including specialist BTL lenders.
  • Expert guidance on navigating UK-specific mortgage regulations and requirements.
  • Assistance in optimizing financial structures for BTL investments and minimising tax liabilities.

A mortgage broker is there to provide advice on mortgage options to ensure that the product you are applying for meets your needs and circumstances. We have access to a wide panel of lenders which will have a variety of different mortgage products, including those who offer more specialist mortgages should they be needed. We have a wealth of experience working in the Buy to Let market and understand the criteria with each lender well, to ensure we get the right outcome first time.

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Complete Guide to Buy to Let Mortgages

Check out our detailed guide on everything Buy to Let Mortgages, from the hidden costs involved to responsibilities as a landlord and how to apply for a BTL mortgage.

Read our Buy to Let Mortgage Guide
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