Buy To Let Mortgages

What is a buy-to-let (BTL) mortgage?

Ask yourself the following:

  • Do you want to become a landlord and rent out a house or a flat?
  • Are you already a landlord and want to rent out additional properties?

If so, a buy-to-let mortgage might be the right mortgage for you.

What is the difference between standard mortgages and BTL mortgages?

Compared to normal mortgages, where the lender looks at your income to find out if you can repay the mortgage, lenders looks at the rent potential of the property in case of BTL mortgages.

The lender will expect the rental income to be more than the repayments – typically 25% more than the repayments.

This difference is there to address the risks associated with being a landlord such as tenants who do not pay, or times where the property is not rented out.

Some lenders may waive this rule for professional landlords who already have several buy to let properties in their portfolio.

Some providers may incorporate your income in addition to the rental income, which could allow you to get a bigger mortgage.

The lender may ask you that you provide a letter from a letting agency stating how much rent can be expected from your BTL property. It is a good idea to ask different agencies for a quote so that you can be sure the expected rental income is correct.

Standard mortgages are not available to you if your plan is to rent out the property.

Please note that for UK holiday homes and overseas properties different mortgage types are used: holiday home to let mortgages and overseas mortgages. These mortgages are different from BTL mortgages.

Buy-To-Let Mortgages - Pros & Cons

Pro

  • Properties to rent are more and more in demand these days
  • Some pf the costs associated with a BTL property are tax-deductible
  • The money you earn from the rent should be enough to cover the repayments

Cons

  • There might be issues with tenants who do not pay
  • Deposit and arrangement fees are typically higher than normal mortgages
  • There are many costs associated with renting out a property

Is it possible to buy several properties with a buy to let mortgage?

This is usually not possible for first-time buyers, but can be an option for existing landlords. The majority of buy to let properties are owned by landlords who already own several properties.

If you already own BTL properties, it is important that the lender is aware of it as you must be able to get a better deal.

If you already have several buy to let mortgages for different properties it is possible to group all of them in a single mortgage. An adviser can explain the advantages of having all mortgages with the same lender and explain if a particular lender might impose restrictions how much you can borrow or the number of properties you are allowed in the portfolio.

It is best to start with one property in your first BTL mortgage. Once you gain some experience and understand what being a landlord involves, you can then expand your portfolio. BTL investors typically take 2 years to assemble a portfolio of 5 properties.

What options do I have with a buy to let mortgage?

Different types of BTL mortgages are available such as discount mortgages, tracker mortgages, flexible mortgages or fixed rate mortgages. The best option will depend on your situation.

  • A discount mortgage will provide you with reduced payments at the start of the term. You spend the money you save towards improving the property for renters. You have to make sure you can afford the repayments at the end of the discount period.
  • A tracker mortgage can be a way to save money.
  • A flexible mortgage allows you to adjust the repayments in function of the rental income (for example by taking a payment holiday in case the property is not rented out).
  • A fixed rate mortgage is simple and easy as the repayment amount will be the same every month.

Buy to let mortgages also exist as interest-only mortgages. This is both tax efficient (interest costs on the mortgage are tax deductible) and reduces the monthly repayments.

In most cases, buy to let mortgages landlords will sell the property in the future and relies on capital growth to repay the loan.

Are rates higher with a buy to let mortgage?

The answer is usually yes.

Although premium rates are sometimes available for BTL mortgages, this will usually depend on the deposit amount and the mortgage arrangement fees.

Arrangement fees are usually higher for a BTL mortgage. These are typically calculated as a percentage of the property price.

The required deposits are typically high (15% of the house price). You’ll get the best deal with a large deposit and/or high arrangement fee.

Is it possible to re-mortgage my buy to let property?

Remortgaging can be a good choice for a buy to let property.

If you manage to build up equity on a BTL property, you can re-mortgage that property and use the money as a deposit for another. This is the way landlord typically build their portfolio.

Remortgaging can also be done to help towards improvements or refurbishing on your BTL property.

Is it hard to make a profit out of a buy to let property?

Although things seem simple – you provide a deposite and the rent will deal with the repayments – it is a lot more complicated in practise, so it is important to do enough planning and research. If you do so you are likely to profit from a BTL property.

It can take time before you profit from a property, so you need to commit between 5 and 10 years in order to make returns.

Now is actually a very good time to invest in BTL properties. Several factors contribute to this:

  • High property prices, so many people cannot afford a deposit and rent instead.
  • There are more single people
  • Jobs are more mobile
  • More students go to university

It is vital that you plan and save some money for maintenance work and to cover the rent during vacancy period. Several options are available if you have difficult times: increasing the rent, selling the property etc...

Guides are available to help you. It can also be useful to get in touch with an agency that can provide some help to BTL landlords.

Where can I get some help?

It is important to speak to a letting agency. A letting agency can help you value properties you are interested in. They can also provide advice about what areas are likely to be good choices for BTL properties, and evaluate how much rent you can charge for a particular property.

If you choose to use an agency, have a look at the ARLA (Association of Residential Letting Agents). The ARLA is an organization of letting agencies that also include buy to let mortgage providers, such as NatWest Mortgage Services or Paragon Mortgages.

Using a letting agency comes at a cost, but it can be a good idea to save you time and effort. It can also be a requirement of some lenders that you use such an agency. The amount agencies charge is usually based on a percentage of the rent, between 10 and 15% based on the service provided : finding tenants and checking references, setting up agreements, dealing with maintenance, collecting the rent.

Buy to let mortgages are available from normal and specialist lenders. BTL mortgages are more difficult to arrange than other type of mortgages, so typically specialist providers will only want to arrange mortgage using an adviser. If you are interested by a BTL mortgage, fill in this form and an professional adviser will call you to discuss your current situation and recommend the best deal for your need.

Some documents are available on the web that provide useful information on BTL properties, see for exemple:

What do I need to know before becoming a landlord?

It is important that you do some research and planning. There several sources of information and people you talk to such as estate agents, local papers, local businesses. By doing this research, you will understand if there is a demand for rented accommodation in the area you are targeting. You will need to understand if there are already a lot of rented properties so that you can assess how much competition you will have to face.

The location is vital and will need to match the kind of tenants you are targeting. For families, you should take at look at stores and schools. For single people, you are more likely to find out about bars or shops.

The condition of the property is the next thing to consider so that you can plan for renovation/maintenance costs. If you are targeting students, you probably have to buy furniture for the property, where as for families, you are more likely to rent out an unfurnished property. Decoration and furnishing should be neutral looking as everybody has got different tastes.

It is crucial that you do some financial planning. The rent should be high enough to cover the repayments, but you need take into account vacancy periods, and how you will repay the loan when the property is not rented out.

What are the responsibilities of a landlord?

There are several responsibilities as a landlord such as finding tenants and checking their references, maintenaing the property in an acceptable state, collecting the rent, making sure safery regulations are met.

What are the costs involved with a buy to let property?

The costs involved a buy to let property are typically

- The initial fees to cover the deposit (typically 15% of the property price), mortgage fees and the costs involved in decorating and furnishing the property.

- The monthly costs such as the mortgage repayments, insurance cost and agency fees.

Do not forget there might costs you might for get about such as solicitor’s fees, stamp duty of building insurance.

It is good idea to keep 6 months worth of rent in a saving account in case you have to face unexpected costs or have a long vacancy period.

We would advise that you contact an adviser if you need some help with the financial planning involved with a buy to let property.

What are the tax implications of a buy to let property?

A booklet is available from the Inland Revenue that explains the tax implications of being a landlord - see www.hmrc.gov.uk/nonresidents/fagir150.shtml.

A buy to let mortgage allows you to deduct some of the costs associated with rental property. These include rental insurance, agency fees, maintenance costs, advertising as well as 10% of the rental income.

You will have to pay tax on the rent after the costs have been deducted.

It is important to keep enough documentation (such as mortgage documents or rental payments) for tax purpose. An accountant can be a useful person to talk to explain what costs can be claimed to reduce your tax bill.

Bear in mind that you will have to pay Capital Gain Tax if you choose to resell the property.

What insurance is required as a landlord?

Different types might be required for buy to let properties. These include contents insurance, building insurance or rent guarantee insurance.

How to get a buy to let mortgage in the UK

Just fill in this short form and a mortgage adviser will contact you to answer all of your questions, give you buy to let mortgage advice, and get you on your way to buying your property.