Buy to Let Mortgages

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Buy to Let Mortgages

Buy to Let Frequently Asked Questions

Listen below as Michael Webb talks all about Buy to Let Mortgages

In less than 30 minutes, you’ll know a lot more about how to get a Buy to Let Mortgage

What is a Buy to Let mortgage and how do they work?

A Buy to Let mortgage is finance for people looking to buy a property with the intention of letting it out on the residential housing market. Typically that will be an investment property. 

Because of that, it has different regulations and Buy to Let mortgages are not regulated by the FCA. They are classed as commercial mortgages. They are overseen by the Prudential Regulation Authority, though, and there are regulations that apply to Buy to Let mortgages that mean that lenders have to put certain things in place for affordability. These changes came in after the housing crash after the financial crisis in 2008/2009. 

There’s generally less focus on the overall affordability calculations but there is a need to demonstrate that should the property not be let, the borrower can still afford to pay the mortgage.

How is a personal Buy to Let different to a limited company Buy to Let? 

Limited company Buy to Let became very popular after George Osborne decided to tax rent, rather than the profit on rent, and then changed the taxation structure for landlords. To get around this people started to purchase Buy to Let properties through a limited company. 

Obviously we’re not in a position to say whether that’s the right thing for people to do – they should seek independent taxation advice from a tax advisor. The difference is really just the limited company wrap. 

If you’re buying a property in a limited company, you’re remortgaging or moving properties over to a limited company, you will still be underwritten as a director of the limited company. That’s the same as being an individual applicant on a personal Buy to Let – your own credit files will be checked and you will have to meet any affordability criteria. 

In essence the lender is allowing you to use the limited company wrap for the transaction, on the understanding that it’s only there for the tax benefits. Yet limited company Buy to Let mortgages do have other criteria attached to them.

The limited company has to have a specific SIC code at Companies House, describing what that company does. Typically it has to be a Special Purpose Vehicle which means that they are holding companies for property, not trading companies. 

Mortgages are available for companies that trade, but the market is much smaller and directors are required to give a director guarantee. That means if the company were to close or go bankrupt, the bank will chase the directors independently for the debt. So the banks have closed any loopholes that borrowers may think are there to protect them. 

A limited company has limited liability, but lenders are removing that for the property transaction. Because of that the directors then also need to obtain independent legal advice, which is an additional cost to factor in.

Can anyone get a Buy to Let mortgage?

While there are different niches within the Buy to Let mortgage world, most people can apply for a Buy to Let mortgage. That includes First Time Buyers – so you can be a First Time Buyer/First Time Landlord. This is very popular with people who can’t necessarily afford to buy a property locally, but want to buy an investment property in a more affordable area. 

In this case, lenders would limit your borrowing with income multiples – you’d have to meet the lender’s residential criteria as well as their Buy to Let criteria. That market is quite small but it’s still possible. 

The typical Buy to Let purchaser is already a homeowner, and it’s very important for you to meet a minimum salary requirement, usually around £25,000. Having said that, quite a few lenders now have moved to no minimum income, but you need to demonstrate that you have some earnings. 

Obviously your credit file will also be assessed, but generally most people can be placed for a Buy to Let mortgage.

How much can you borrow on a Buy to Let mortgage and what sort of deposit do you need?

The deposit depends on the products available in the marketplace and the background rental calculations. The typical amount lenders would ask for is a 25% deposit – that’s the baseline. The more you put down, typically the lower the rates you can get, down to 60% Loan to Value. 

However, the marketplace does frequently have deals at 80% Loan to Value and sometimes at 85%. These drop in and out of the marketplace depending on lenders’ attitudes to risk. 

How much you can borrow on a Buy to Let is based on a background rental calculation which is difficult to describe – it will be different depending on who you are, your tax status and whether this new rental income will change that status. It will also depend on the potential rent for the property as set by a surveyor. 

Typically lenders want to see a rent that would cover the mortgage payment at a much higher interest rate than you may be paying, to factor in interest rate growth.

How much does a Buy to Let property cost?

It will really depend on whether you’re buying in your own name or a limited company. Either way, you’re likely to have to pay for a valuation survey. A minimum mortgage valuation on the property might be free, but typically on Buy to Let you will need to pay for it. 

There are usually arrangement fees on the mortgage and they are commonly a percentage of what you’re borrowing rather than a fixed amount. That can usually be capitalised and added to the loan. You’ll then have things like solicitor’s costs which may be slightly raised for Buy to Let because there may be other things to check, especially if you’re buying or remortgaging a Buy to Let that’s already got a tenancy. 

Limited company mortgages are likely to have more expensive legal fees because there’s more to do, plus there are the independent legal advice costs. You also need to speak to your tax advisers on the costs of running that limited company and returning your year-end accounts. You’ll need to do your accounts plus a personal tax return if you withdraw money from the company. You’ll have to do a personal tax return for your Buy to Lets as well.

Speak to an expert

We’ll talk to you about what you’re looking to achieve, what’s important to you in the mortgage, what your financial goals are. We help you formulate your strategy and make the most appropriate recommendations for you. It means you get the most appropriate and best deal for your circumstances.

Is it illegal to rent out a house without a Buy to Let mortgage? Is it illegal to live in your own Buy to Let property?

So it’s not illegal in the sense that they’re going to put you in prison. It’s all about your mortgage conditions. Your mortgage offer and terms and conditions on a Buy to Let mortgage will state that you will not live in the property and nor will a direct member of your family. 

It’s because that would change the regulation – it would be a residential mortgage contract and that’s not what they’ve given you. Having said that, you can ask the lender for permission to live in your Buy to Let property and they may well grant it based on the circumstances. 

With regards to renting out your own house without a Buy to Let mortgage, it is common for people to do this and obtain ‘permission to let’ from their residential lender. Lenders don’t have to give permission, but they usually will if you’ve got a legitimate reason. 

For example, if you’re living in the south east and your job is moving to the north for a couple of years, you probably want to retain your property. They may well allow you to let your property out whilst you rent in the north. 

All mortgage contracts also allow you to rent out a room in your property, so you can have a lodger. As we sit today – and you do need to check at the time that you’re listening to or reading this – you can take £7,500 income from renting a room in your own property, tax free. It’s called a lodger allowance on your personal tax. You don’t need to declare it to HMRC unless it’s over £7,500 

There are also some criteria that apply to people in the armed forces. They can buy a property on a residential mortgage and many lenders will give them immediate permission to let on the basis that they intend to live in that property as their home once their tours have completed.

Should I choose interest only or repayment on a Buy to Let mortgage?

We talk to property investors about this all the time. Most commonly, Buy to Let is done on an interest only basis. Let’s say the rent is £750 and on a capital repayment mortgage your monthly payment is £700. What you may find is that your tax bill is more than the difference – so you’re having to find additional money for your tax bill. Most people instead adopt an interest-only strategy to make sure that there is surplus cash to pay tax. 

However, you really do need to look at your Buy to Let strategy. If you’re looking to have a mortgage-free property for when you retire, and let’s say you’re in your 30s, you have significant time to take out a repayment mortgage. But if you’re looking for an immediate income now, that may push you towards interest only. 

There is no one size fits all for this. It’s down to your overall goals so discuss it with your mortgage broker and we will advise you the right approach.

How many Buy to Let properties can I own? Is there a limit?

There’s no limit at all. The largest private landlord in the UK has a portfolio pushing up towards a thousand properties. So the only limit is your capability to fund the purchase of that level of property. We’ve started with people buying their first property and now many of them are into double figures. We also deal with people who have upwards of 200 properties . 

Lenders do have limits to what they will lend you. Once you own more than three Buy to Let properties you will be cast as a Portfolio Landlord. At this point the underwriting on your applications becomes more complex, as lenders have to follow guidance from the PRA. Some lenders therefore choose not to lend to anyone with more than three properties due to the extra assessment work.

Buy to Let mortgages will also have a lending limit. It might be up to £1 million or £2 million or some will lend up to £10 million. Alternatively they may only lend to you on five properties. 

Most people with very large portfolios haven’t achieved that over a short period of time. They have been built up over years, by remortgaging the equity out to buy more as property values have increased.

What else do we need to know about Buy to Let mortgages?

The Buy to Let market is classed as commercial lending and there is some terminology you may hear. A typical Buy to Let will be classed as a business Buy to Let. But it may need to be underwritten as a consumer Buy to Let. 

Consumer Buy to Let is where you have lived in the property previously. If you’re doing a Let to Buy – where you remortgage and rent out your residential home to buy another one – that would be classed as a consumer Buy to Let. It will go through a different, more stringent underwriting process. Potentially if you’re having a family member live in the property, that would come under consumer Buy to Let. 

Because of the complexity behind all this, most Buy to Let mortgage lenders will only deal with brokers. You can’t approach them direct. Even the largest lenders that deal with Buy to Let mortgages (the Mortgage Works and Birmingham Midshires or BM Solutions as they’ve rebranded in recent years) are only accessible via a broker. 

Your property may be repossessed if you do not keep up with your mortgage repayments. The Financial Conduct Authority does not regulate some Buy to Let Mortgages. 

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