What is a Buy To Let Mortgage?
What is a Buy to Let Mortgage?
A Buy to Let Mortgage is a loan secured against a property which is purchased solely for the purpose of renting out to make a profit. The property is known as Buy to Let (aka BTL).
How does it work?
As the whole purpose of a Buy to Let is to make a profit. Lets looks at the 2 methods of making this profit.
Method 1 , you need to purchase a property in which the rent generated is significantly higher than your Monthly Mortgage Payments.This difference between the rent and the Mortgage Payments will form the basis of your Gross Profit. It’s from the Gross Profit that you will pay all your expenses and finally get your Net Profit, your income.
Method 2, you will keep this property for a number of years and when finally sold you could make a gain from ‘Capital Appreciation’ over the years
Some Investors will be happy with one or two properties. However others will Remortgage their properties to extract further cash and purchase additional properties, creating a portfolio.
What makes Buy to Let Mortgages different to a normal Mortgage?
The main difference is that with a standard Residential Mortgage the amount of loan available is determined by your salary. Whereas, with a Buy to Let Mortgage how much you can borrow is based on how much rent the property can earn. So the viability of a Buy to Let is all based on the Rent!
In essence it is that Simple (in theory). However But to Let Mortgages can get complicated and be similar to peeling an onion, layers & layers of complexities. This is why it its important to find a competent Buy To Let Mortgage Broker to help you chose your options.
Do I need a Buy to Let Mortgage to rent out a property?
Technically speaking Yes .The terms & conditions on a Buy to Let Mortgage are specifically for the property to be Let. The terms & Conditions on a Residential property are specifically for you to occupy.
So you can see if you do not stick to the occupancy type you are breaking your terms & conditions. However, in some circumstances lenders will consider you letting out your existing residential (consent to let). This will be on a case to case basis.
How much deposit for a Buy to Let mortgage?
It is important to remember that this is a form of investment, classed as a commercial Transaction (business). Therefore the minimum deposit required for a Buy to Let Mortgage is higher than for a normal Residential loan.
Typically, you will be required to cover at least 20% of the property value yourself on a Buy to Let Mortgage. This is known as the deposit.
How much can I borrow on a Buy to Let Mortgage?
With a Residential Mortgage, the amount you can borrow is based on your salary minus your outgoings. Whereas with a Buy to Let Mortgage its assessed on the Rental Income that the property is likely to generate.
Lenders will typically need the rental income to be at least 125% of the monthly mortgage payments (on an interest only basis), or even up to 145%. This is what the lenders call the Stress Test and each lender will have their own criteria.
What is the best rate?
With over 50 Buy to Let Lenders and over a 1000 different products (that are changing on a weekly Basis) its fair to say that there is no best rate.
It is better to ask “What’s the best rate for my circumstances & needs “
In addition when we are giving advice to our Buy to Let clients we do not just look at the ‘Headline Rate’. We look at all the cost over the course of the term.
It’s important to look at all of the underlying cost and not be seduced by the headline grabbing rate.
Due to a Buy to Let being a ‘Commercial Enterprise’ the rates charged will be higher than a Residential. This is expected however, as we are in a climate of low interest rates, the Buy to Let rates are priced very low.
Expert Tip -On all fixed rates make sure to have a look at the lenders standard variable rate (SVR). This is the rate you will on after the fixed rate finishes, some the SVR can be double the headline rate. Do your sums for the worst case scenario.
Arrangement Fees
All Lenders in this sector charge fees, as you know they are in the business of making money.
If we think about it they are not making huge chunks of money on the interest rate charged. They have to borrow the money from bigger banks and lend it out, so the margin is slim.
Hence they will Charge Admin fees (aka Product fee). Some lenders will charge a flat fee and some will charge it as a percentage of the Loan. Along with the Admin fee there could be Survey Fees, Application fee’s, solicitors’ costs. A competent Mortgage Advisor has a duty of care to explain all of these fees before an application is made.
How to get a Buy to Let Mortgage?
Getting a Buy to Let Mortgage can be simple however, it has not easy. Due to the layers of complexities (wide range of Lenders all with different criteria’s in assessing your application) it takes a bit of research, time and knowledge to make smart decisions at every phase of the process.
General process of a Buy to Let Mortgage:
- Do some initial research on the type of property you want to buy and the area you want to buy in (How to chose a Buy to Let property)
- Think about your budget including how much you deposit you can put down
- Work out how much rent you might be able to earn. Tip - look on Rightmove etc for latest rents in the area
- Think about what are your medium to long term business Plans. Are you looking at only having a couple of properties or have you intention’s of being a Portfolio Landlord? Your answer will determine wether you should buy in your Sole name or form a Limited Company.
- Obtain a latest copy of your Credit Report and make sure it does not contain any bad credit
- Source a competent Buy To Let Broker and see if you can work with them to submit your application
Getting a Buy to Let mortgage with a Broker
The best way to get a Buy to Let deal is to seek advice from a Buy To Let Mortgage broker. We would say that because that’s what we do, however hear me out…
Just like other professional from Doctors and Vets to Tradesmen, we do this job day in and day out. We know all of the quirks & nuances of all of the Lenders ,and what they like and what they will not entertain .
Having a professional in your corner will help to make sure your application hits the Bulls eye the first time
Why Us
- Raising The standards of financial advice
- Making financial advice accessible to all
- Trusted & stress-free financial advice
- Friendly, personable advisors
our Mortgage Butler service
Help you to collate all of the documents you will need to apply for a mortgage
Complete and submit your application
Handle all the enquiries by the Mortgage Lender
Liaise with your Estate Agent
Help you to nominate a good & competitive solicitors
Work with all the parties to get you to Mortgage completion
Keep in touch with you on a yearly basis and help with your future needs
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Like all form of investment, there’s a lot to consider before you make the jump into a Buy to Let Mortgage as there’s no guarantee you will make any money.
Purchasing a Buy to Let, whilst over the long term can be a made to sound like a good business it is also full of pitfalls with layers of tax & legislation rules that can give even a property professional a headache.
The result of introducing the removal of tax relief has led to a withdrawal of part time landlords from the sector.
This has left the field to the professional landlords. Those who are in it for the long-term, possibly do it as a full-time job, who don’t sell existing properties and may be actively looking to add to their portfolios.
However, we have tried to explain Buy to Let for beginners. So, if you’re a first time buyer of a Buy to Let property, this following information should help you get a basic understanding.