Buy to let mortgages explained
Published 6th December 2017
Searching online for buy to let information can be a difficult thing to do, as a lot of Google searches often bring up loads of spam websites with out-dated and inaccurate info. We also get hundreds of enquiries all asking similar questions, so have collected all the relevant information together in our buy to let mortgage guide, to help anyone that wants to know how to get a buy to let mortgage in the UK.
What is a buy to let mortgage
A buy to let mortgage is where a charge is taken by a lender on a property that is being rented out. They can be taken either at the time of purchasing the property or as a remortgage on an existing property to change it from a main residential mortgage. It is just the name for the type of mortgage that is registered on a property specifically for the purpose of renting out, by all intents and purposes they are just like any conventional mortgage.
How do buy to let mortgages work?
Some queries we receive ask 'what is buy to let' and 'how do I apply for a rental mortgage?'
Well basically, they are set up and work in almost exactly the same way as standard residential mortgages from a legal standpoint, but have very different criteria in terms of who is eligible and how much a person can borrow. There are certain buy to let rules that differ massively from residential mortgages - the main ones being the ability to borrow on an interest only basis and the mortgage affordability calculations.
Buy to lets are usually taken on an interest only basis and then the investor can decide if they wish to repay the capital with the surplus rental income, or take it as an income. The process of getting a buy to let mortgage happens in a different way, as the assessment on how much you can borrow on a particular property depends on the viability of the investment, rather than the applicant’s personal income. Click here for more on buy to let criteria.
Buy to let costs
Anyone wondering ‘is buy to let a good investment for me’ will be most interested in the potential profit. For that, it’s important to establish the rental yield, and the potential costs involved. One of the pitfalls of buy to let can often be the increase in costs associated with buy to let mortgages when compared to standard residential properties – the rates and set up fees are almost always higher. So, it’s important to factor them all in when considering a purchase. Below is a buy to let costs breakdown to give you an idea, although each purchase may be different depending on the solicitor and on the specific buy to let mortgage product you apply for.
Typical Mortgage Costs
|Broker fees||This depends on the complexity of the mortgage and the type of product you are taking. For example, typical fee's for secured loans / second mortgages tend to be higher than those of main residential mortgages. Some brokers charge £0, others anywhere up to 4% of the loan amount.|
|Lender Application / Booking fees||Every lender deal is different. Some are fee-free and others charge non-refundable upfront fees, of say £500, for example. This allows them to only take in applications from borrowers who are more committed to proceeding.|
|Valuation fees||This is entirely dependant on the property value, type, location, and the product you are taking - some mortgages products offer a free basic valuation report. You will usually pay more for home buyer or full structural surveys. For more on this click here to see what Colley's Surveyors charge.|
|Mortgage product fees||These are dependant on the product type & property value. Some lenders charge nothing, others a fixed fee of say, £500, and others a % of the loan amount (For larger loans it can work out most cost effective to chose a product that has no fee or fixed fee).|
|Mortgage exit fees||Again these are different lender to lender, and product to product. Also, if you are tied into a deal and want to leave early, there may be additional costs associated with this known as Early Repayment Charges (ERCs).|
|Solicitor fees & disbursements||Solicitor costs vary depending on their charging structure. Some charge fixed fees, others per hour, and some a % of the property (more rare nowadays). Occasionally lenders will offer free legals as an incentive for borrowers to take their deal.|
|Stamp duty||For exact figures on stamp duty as at today's rates, click here for the .gov articles|
|Property maintenance||From £0+anything! (Depends on the state of the property!)|
|Letting agent fees||Either a fixed fee or % of rental income. Common charges are 10% of the monthly rent (so £35pm charge on a £350pm rental).|
|Income tax||From £0-50% (Depends on your current income and rate of tax paid). For more info visit HMRC for help with buy to let tax|
What are the typical total costs of buying a buy to let?
Buy to let LTV
How much deposit do I need for a buy to let?
Updated for April 2014: The minimum deposit needed for a buy to let is now just 15%, so you could get an 85% LTV mortgage under the right circumstances (suitable property, and sufficient rental income required).
The LTV is the loan to value ratio, which means the size of the loan compared to the value of the property, expressed as a percentage. So, a property worth £100,000 and a loan of £75,000 = 75% LTV. Typically, buy to let mortgage LTV’s are capped at 75% with most lenders - so a deposit of 25% is required, although some allow experienced landlords to go higher than this, and in certain circumstances 80-85% deals are available. For purchasing a £100k property, with most lenders your deposit would need to be £25,000, but in actual fact the advisors we work with would be able to arrange something with just £15,000 .
The impact buy to let loan to value has on rates is huge, as it’s a big factor for the lenders when pricing the risk of the arrangement. A high LTV equates to higher risk of them not recouping money lent in the event of default, which in turn results in higher rates.
Which buy to let rate should I choose?
See our article on fixed Vs tracker rates here. The short answer is – there is no answer. As the market changes, no-one can predict what will happen with rates, and with the increased pressure on the economy and the effects change of parliament will have, mortgage rates could remain low for the foreseeable, or increase as house prices continue to rise. It’s important to consider the difference in cost between the two, and decide if it’s worth paying more for a fixed rate or if you’re comfortable with the fact rates and costs may increase on a tracker. A whole range of mortgage rates are at record lows at the moment, and this is because lenders have cashed in on the government backed ‘funding for lending’ scheme that has seen billions of pounds become available to institutions at a very low 0.75% rate. The scheme is set to end mid 2015, so the thought is that rates are likely to increase at this point. Update for April 2017: The funding for lending scheme has now been pulled early and is no longer in existence.
Fixed rate buy to let mortgages
Buy to let fixed rate mortgages are currently very well priced, and often the difference between fixed and tracker rates is negligible – sometimes lenders fixed rates are even cheaper than trackers. Why, we don’t know exactly! But it’s usually something to do with the cost of borrowing to the lender, and their marketing.
For the best buy to let rates see today’s best buys here
Buy to let tracker mortgages
When compared to fixed buy to let mortgages, trackers tend to be priced slightly cheaper because if rates and costs increase to the lender, they pass that on to the borrower, whereas for fixed rates it eats into the lenders margin.
For the best buy to let rates see today’s best buys here
Buy to let offset mortgages
Offset mortgages are hard to come by at the moment, and with savings rates being so low many investors are taking to other means of saving than keeping their cash in the bank. However, there are a certain few lenders that offer them secured against main residential properties in the conventional sense, and one or two who offer offset accounts on buy to let properties. Because so few lenders offer them however, the choice of product is limited and often you would do well considering the cheapest buy to let rate elsewhere, and investing your cash into accounts with the best savings rates or in secure stocks and shares.
Buy to let tips
Shopping around: Some mortgages come with high fees, and even charge a % of the loan amount rather than a fixed fee. Higher mortgages will benefit from a fixed fee, smaller mortgages are often better off charged as a %. Make sure you search for overall best deal, not best rates.
Perseverance: If you have been declined, remember there’s many lenders out there that have very different criteria and who may be able to offer you the mortgage you need. So don’t give up! Make an enquiry and have one of the whole of market buy to let specialists search every lender in the UK on your behalf.
Fees: Look for offers on free valuations and legal services. The costs for valuations on buy to lets is often higher than those for residential properties, so a free valuation can save you hundreds. Remortgage services often come with free legal costs too – but be wary of products that tie you in to one solicitor, as they can charge much higher fees than you could get elsewhere. When you are borrowing large amounts, avoid the deals with a % arrangement fee and stick to the fixed fee's. For example, borrowing £300,000 with a product charging 1.5% (not an uncommon BTL fee) would be £4,500, whereas having a deal with a fee fixed at £999 may work out far cheaper overall, even at a higher rate of interest.
Tax: Check out the tax advice from HMRC here, and make sure you keep a record of all costs you incur as often they can be offset against your income to reduce your tax bill.
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