Buy to let mortgages vary quite considerably. Finding a property at a great price is one part of the equation, the other part is finding a buy to let mortgage to go with it. After all, it’s your mortgage that will really determine how much you’ll cash flow each month.
Please note, this guide is written for both new and experienced landlords.Get Advice
What is a buy to let mortgage?
A buy to let mortgage is used for property investment and can’t be used to buy yourself a home to live in. This is because you’d rent the property to tenants once purchased. You’d require a residential mortgage if you’d be living in the property yourself.
Can I get a buy to let mortgage?
There are numerous factors that lenders will assess during a buy to let mortgage application. We’ve broken these down into digestible chunks below.
What are the age limits for a buy to let?
If you’re over the age of 18, getting a buy to let mortgage shouldn’t be an issue (in addition to meeting other criteria). Do bear in mind that there are some lenders that will only approve mortgages to borrowers over 25.
Some lenders may also have maximum age limits. This is so that when borrowers reach retirement, they’re still able to make mortgage payments, even if no rental income is being received.
How much do I have to earn?
Some lenders will require borrowers to have a minimum income of £25,000. Other lenders have no minimum income requirements. As a result, they’ll require your rental income to be 125-145% of the mortgage.
How is rental income assessed?
Some buy to let lenders will solely assess the affordability of the mortgage. Lenders calculate this by ensuring the annual rental income is at least 125% of the annual mortgage interest payments.
If you’re paying £10,000 in mortgage interest a year, then the lender would need at least £12,500 a year in rental income. This is usually quite realistic, as the rental income often covers the interest payments by more than 125%. If you can prove this to a lender, then getting a buy to let mortgage should be no problem.
Lenders allow for the additional 25% to factor in void periods (when there is no tenant) and other landlord expenses such as letting agent fees and maintenance costs. Statistically, repossessions occur more on buy to let mortgages as opposed to residential mortgages, so lenders are slightly more strict when assessing buy to let applications.
Will I need a large deposit for a buy to let?
Lenders will generally require a 25% deposit for a buy to let mortgage. In other words, if the property you’re buying is £100,000, you’ll need a £25,000 deposit.
With buy to let (and most other mortgages), a larger deposit can unlock the best rates. If you have a 40% deposit as opposed to a 25% deposit, there can potentially be a larger pool of lenders willing to give you a mortgage.
If you have less than a 25% deposit, you most certainly will need the help of an experienced advisor. This is because there aren’t many lenders that will approve buy to let mortgages with less than a 25% deposit.
Do I need a good credit score?
Having a healthy credit score will always give your mortgage application an advantage. Sometimes a great credit score can mean getting a great product at a great rate. Having a bad credit score could result in getting a less desirable product at a higher rate. This can then have a negative impact on your rental income and monthly cash flow.
Don’t worry, not all lenders will use a credit score to assess a buy to let mortgage application. Some lenders are very strict, some are flexible and other lenders won’t even take your credit score into consideration.
If you have bad credit and require a buy to let mortgage, we may still be able to get you a great product. This is because we work with specialist lenders who can still offer competitive rates.
How can I maximise my rental profit?
Believe it or not, this has a lot to do with your buy to let mortgage. Yes, you can convert a house into an HMO (house of multiple occupation) to really squeeze those rental yields, however, it all starts with your mortgage. Savvy investors know a good mortgage product when they see one, let’s have a look at ways you can spot one too.
Interest-only vs repayment mortgages
First off, savvy landlords love an interest-only mortgage. The reason is simple, you will retain more of the rental income this way, as you are only paying back the interest on your mortgage.
The large majority of landlords will have interest-only mortgages for this reason. The remainder of the capital is then repaid at the end of the mortgage term, generally by selling the property. There is risk involved here, as if the price of the property plummeted, you’ll still be liable to pay the bank back what you borrowed.
For example, if you bought a property for £100,000 with a mortgage of £75,000, you would need to pay back your lender the £75,000 you borrowed (plus any other fees if applicable on your mortgage terms). The likelihood is that the property wouldn’t depreciate that much but you still need to be aware of the risk involved.
If you choose a repayment mortgage, you’ll be paying back the interest along with the mortgage loan. Your monthly mortgage payments will therefore be higher than those of an interest-only mortgage, however you will own the property outright at the end of the mortgage term.
Landlords with large portfolios may diversify their mortgages. For instance, a landlord with ten properties may choose to have 8 properties on interest-only and the other 2 on repayment mortgages and so on.
Fixed rates vs tracker rates
Some landlords would prefer to fix their mortgages to a particular rate as they know exactly what they’ll be paying for the duration of their mortgage term.
Other landlords who are less risk-averse, may choose a tracker product. This is where the mortgage will usually have a low rate in addition to the Bank of England base rate. The mortgage then tracks the base rate which can increase or decrease, depending on what the Bank of England base rate does.
In the past, some trackers solely followed the base rate, but because the current base rate is so low, trackers usually have their own rate in addition.
How to find the best buy to let mortgages
Landlords often miss a trick by solely focusing on the lowest interest rates. There are three things when considering whether you have a good deal.
- Introductory Rate
- Mortgage Rate
Fees vary, as do rates, so it’s not easy to compare which mortgage is actually better for you in the long run. Some products will offer higher rates but charge no fees and some products will have lower rates with additional fees.
For instance, a rate of 3% with a 1% product fee could cost you a lot more than a 3.5% rate with a £200 arrangement fee. Other products may either include mortgage surveys free of charge or will charge you for the privilege.
By looking at the APRC (Annual Percentage Rate of Charge), you can see the total cost of your mortgage over the entire term. This is perhaps the best way to calculate your overall cost. Everyone has a different appetite so it’s highly advised to secure a mortgage that suits your budget.
Can I get a buy to let mortgage on any property?
The short answer is no, you can’t get a buy to let mortgage on just any property. This is because some lenders have restrictions on certain types of properties. For instance, if you were purchasing a property to rent to a family member, then your buy to let mortgage becomes regulated. A standard buy to let mortgage simply wouldn’t be offered.
Read more: What is a regulated buy to let mortgage?
The property may have severe structural damage which would be highlighted on the mortgage survey. If this was the case, the majority of lenders wouldn’t lend on that specific property. This would also be true where the property requires major renovation works. Furthermore, if you wish to invest in a holiday home, you’ll likely need a holiday let mortgage. Learn more about holiday let mortgages here.
If the property is uninhabitable due to having no working kitchen or bathroom, then a lot of lenders again would decline a mortgage for that specific property. Nonetheless, there are still options such as bridge-to-let finance, which is a type of bridging loan specifically designed for buy to let property.
If you’re applying to purchase a leasehold flat, but the freeholder does not have a managing agent in place, then again this is cause for a lender to decline a mortgage. If you need a buy to let mortgage for a commercial building, then you’ll need a commercial buy to let mortgage.
Read more: Commercial buy to let mortgages explained
It’s crucial to speak with a specialist mortgage advisor as you may require a specialist lender to approve mortgages on properties such as these.
You can call us now on 0800 195 0490 or request a call back from an expert.
I’m not a homeowner, can I still get a buy to let mortgage?
It’s very difficult to get a buy to let mortgage if you’re not a homeowner already. This is because, in the opinion of lenders, borrowers without an existing mortgage can appear at high risk. If you do find yourself in this situation, you’ll more than likely need a specialist mortgage broker to secure you a mortgage.
Is there a maximum of buy to let mortgages I can have?
If you’re a landlord with a large portfolio, you may struggle to gain further finance. This is because lenders can limit borrowers to a certain amount of mortgages and can only allocate so much finance to one individual.
There are some lenders that only allow landlords a maximum of three buy to let mortgages, whereas some lenders don’t limit borrowers at all. Other lenders that specialise in buy to let mortgages often favour experienced landlords, enabling them to access unique products and rates.
If you’re a landlord with a large portfolio and require further finance for buy to let properties, we can help. You may benefit from taking a portfolio mortgage.
Learn more: What is a portfolio mortgage?
My portfolio is in a limited company. Can I use this to get another mortgage?
The short answer is yes. Our experts have helped many limited companies obtain mortgages to further increase their portfolios. This is quite a specific area and there is no one size that fits all.
If you require further information regarding purchasing properties through a limited company, our advisors can answer your questions.
Can I get a buy to let mortgage on an HMO?
If you’ve seen an HMO and require a mortgage, there are lenders out there that specialise in HMO mortgages. An HMO property is where there is more than one tenancy under one property. For example, you might own a 5 bedroom property and have 5 different tenants, each renting out a room.
The criteria lenders look for here is generally the way the HMO is set up. Typically lenders want information on the number of tenancies in the property and the type of tenancy agreements involved. The criteria here is completely different from that of a standard buy to let mortgage, so the majority of high street lenders won’t entertain HMO mortgages.
There are a number of lenders that do specialise in HMO mortgages. There are also other lenders that can offer finance but in the form of a commercial loan. The only disadvantage of this is that they’ll usually charge higher fees and rates in comparison with a mortgage.
With an HMO investment, it’s crucial to get the right lender suited to the deal, as getting it wrong can result in a loss of money. Our expert advisors have specialist HMO lenders on their panel and can talk you through the best deals currently available.