How Do Buy To Let Mortgages Work ?
If you’re thinking of becoming a landlord and are looking for finance to purchase your first rental property you might be wondering exactly how do buy to let mortgages work.
Most lenders will not let you take out a standard homebuyer mortgage, like you might have on your own home, if you intend to let the property out to others. Instead you will need to take a specific buy to let mortgage.
Tax relief rule changes
Before taking out a buy to let mortgage, it is important to note the 2017 tax relief rule changes. From 2017, landlords can no longer deduct their financial expenditure on their buy to let properties whilst calculating their profits at the end of the financial year.
The 2017 tax rules do not affect limited companies and as such only their profits will be subject to tax. This has led to a number of private landlords setting up their own limited companies for their buy to let properties to circumvent the tax rules.
This may a viable option for some private landlords, but there are some associated costs with setting up a limited company that should be considered.
How do buy to let mortgages work?
Like a normal mortgage, a lender will require you to put down a deposit on the property, and the larger the deposit you can afford to put down the better interest you will receive.
As a general rule, lenders require a larger deposit than you would expect to pay for a buy to let mortgage of the same size, the standard minimum deposit size is often 25%. However, it is worth shopping around to see if you can find a buy to let mortgage with a loan to value that fits your needs.
One of the key differences between a buy to let mortgage and a traditional mortgage is how your affordability is calculated. Instead of it being a multiple of your income, lenders generally require the property’s annual rental yield to be at least 145% (or 170% for houses in multiple occupation) of what your mortgage would cost you in repayments annually.
Looking at property websites or speaking to a local letting agent could help you find out how much a property in a certain area could be let for. However, a lender will not base their calculation on what you are intending to charge for rent. During your application, there will be a professional valuation of the property that they will base the potential rental yield on instead.
As with other kinds of mortgages there is a range of repayment plans, where your monthly charge pays off a portion of your loan. There are also interest only plans, where you only pay the interest each month and repay the entirety of the loan at the end of the term of finance.
In additional to the requirement for a rental coverage ratio of at least 145%, landlords will have to endure an income stress test.
Lenders now apply a stricter income stress test than previous years. The income stress test is designed to minimise the risk of landlords falling into arrears on their mortgage payments.
To satisfy the lenders' income stress test, landlords need to illustrate that they can afford mortgage payments even in the event that the interest rates increase to 5.5%.
Lenders will request an in-depth review of the landlord's property portfolio for anyone with multiple buy to let properties.
In previous years, if a landlord had multiple properties and one of them was not profitable, they could spread the equity from a more profitable property to prop up their entire portfolio.
Lenders will no longer look at properties in isolation and will not provide a buy to let mortgage to landlords with one or more properties that are not profitable.
Terms and conditions
Lenders may also have certain stipulations about what you may do with the property over the course of the mortgage, for instance some may require you to have a minimum tenancy length agreed with your tenants or will not let the property as certain kinds of tenancy. Many lenders require you to take out a specialist landlord buildings insurance policy.
Finding a buy to let mortgage
BTL mortgages like most kinds of mortgages are big financial commitments and can take a long time to pay off. Therefore, it is worth shopping around to compare the market to try and find the best plan for you.
If you’re currently looking for buy to let finance you may find using the Fair Mortgages calculator helpful. You just need to select ‘buy to let’ from the drop down menu and fill in all of the relevant information, the buy to let calculator can then provide a selection of buy to let mortgages that fit your requirements. You can then compare and contrast their different features to see if you can decide which you would prefer.
If you’d like to find out more about buy to let mortgages, you could fill in the enquiry form on this website to request a call back from a Fair Mortgages Adviser who can provide you with a free initial conversation about mortgages.
Our Buy to Let Mortgage Broker Service
Why choose us?
Fair Mortgages can provide you with a first class service if you are looking for buy to let broker mortgage service.
Special features of what our broker service offers include:
- Rental Income Requirements - What lenders now require on rental income - we can help you through the lender criteria maze
- Whole of Market Buy to Let Broker - we deal with most UK buy to let lenders
- Buy to Let Rates - Access to leading buy to let market rates
- Exclusives - Access to exclusive buy to let mortgage deals not available on the high street
- Our Buy To Let Expertise - Expert help whether you are a first time landlord or full time landlord
- Credit Issues? - We have lenders who will take into account previous defaults and missed payments if applicable
- Experienced Buy To Let Investor? - Have a complex buy to let or have a portfolio of 5+ properties? - speak to us
To investigate your buy to let mortgage options, call our specialist team on 0117 403 4474 or fill in our call back form.