A Buy to let mortgage is a mortgage taken on a property that you let out to tenants to live in, rather than living in the property yourself.
There are different types of buy to let mortgage and we will come on to summarise these. Some people purchase a property to let it out, a property could be inherited and then let out or you could consider letting your current property out when purchasing a new residential property.
The key difference when it comes to the mortgage on a buy to let property is that most lenders will calculate the amount you can borrow based on the rental income the property receives. For affordability and initial checks this will be based on the rental income currently being received if you already own the property or based on the estimate from a lettings agent if you are purchasing the property. The lender will then carry out a survey on the property and as well as confirming the value of the property, they will also give a rental income that they believe is achievable for the property.
Top slicing mortgages can be used when the rental income for the property is too low for the mortgage you are looking to achieve on the property. Your income and outgoings can be taken in to account to use your income to increase the amount they can offer on the mortgage.
Most buy to let properties will need a deposit of 25% of the value of the property and this also applies with 25% equity required to remortgage your property on to a buy to let mortgage.
You can own as many buy to let properties as you would like to, although some lenders will have restrictions on how many mortgages or the amount of mortgage debt that can be held within their banking group. Once you own 4 or more buy to let properties, you are classed as a Portfolio landlord. The criteria and affordability does then change with the majority of lenders. When you first speak to your advisor, they will ask about any other properties you own and take the details of these properties and any outstanding mortgage debt.
If you are looking to let out the property which you currently live in, you will need to get an estimate for the rental income the property will achieve. If you are currently tied into a mortgage deal with a charge to leave the lender, you can ask your current lender for Consent to Let the property out. Some lenders will charge a fee or an increased interest rate for this facility. It is worth speaking to a mortgage advisor to check all your options as they can calculate which option would work out financially better for you.
Some properties are let out on an individual room basis, with each bedroom let individually and the use of communal bedrooms and living space. This is common for students and professionals and gives people the flexibility of being able to rent a room rather than paying to rent a whole property. These properties are known as Houses of Multiple Occupancy (HMO). The mortgages on these properties require specialist lenders and products, so it is important to let your mortgage advisor know if your property is let out in this way.
The majority of buy to let properties are purchased in your name the same way you purchase your residential property. However, some people chose to purchase a property through a Ltd company. The Ltd company will need to be set up with the purpose of purchasing buy to let properties and all directors on the company will also need to be named on the mortgage. The main reason why people purchase properties through a ltd company is due to the tax differences on the income. If you are considering this option, you would benefit from speaking to a tax advisor to check that it will benefit you as you will pay higher interest rates and fees for the mortgage.
The costs involved with purchasing a buy to let property:
- Deposit – normally 25% of the property value/purchase price as a minimum.
- Valuation fees – the lender may charge a fee to check the property you are buying, how much it is worth and how much is a viable rental income for the property.
- Letting agent fees – from the initial advertising and finding a tenant to a monthly management fee if they will be looking after the property for you.
- Gas and Electricity certificates to show the property is safe for the tenants.
- HMO licence fees if applicable for your property – the local council will be able to confirm if your property requires an HMO licence if you are letting out individual rooms.
- Solicitor costs – this will also include the stamp duty payable for the property. The stamp duty will be at a higher rate if you already own a property. Here is a link to our calculator to estimate your costs: Mortgage calculators | Willow Brook Mortgages we would also advise that you check these costs with your solicitor as they can advise on Stamp duty land tax.