Thinking about delving into property investment? SimplyBusiness published a guide to the world of buy-to-let (BTL) mortgages, offering detailed explanations of this somewhat complex subject for potential property investors.
Buy-to-let Mortgage Explained
A buy-to-let mortgage refers to a particular loan type specifically designed for properties that the owner intends to let out to tenants, rather than occupy themselves.
What separates buy-to-let mortgages from their regular counterparts are the relatively higher interest rates and fees. Furthermore, their lending criteria differ significantly, making these aspects crucial to understanding buy-to-let mortgages.
Key Differences Between Buy-to-let and Regular Mortgages
Here are five key differences to consider when looking into buy-to-let mortgages:
- Borrowable Amount: In the realm of buy-to-let mortgages, your potential loan amount primarily hinges upon the projected rental yield rather than your annual income. The expected monthly rental income should be around 30% more than your monthly mortgage payment.
- Arrangement Fees: Compared to conventional home mortgages, buy-to-let mortgages often require higher arrangement fees, which typically range from £1,000 to £5,000.
- Interest-only Mortgages: Most buy-to-let mortgages are interest-only, meaning that you only need to service the interest every month while the principal remains unchanged. The outstanding loan amount, or the capital, will then be settled once the property is sold.
- Regulatory Differences: While the Financial Conduct Authority (FCA) regulates homeowner mortgages, most buy-to-let ones are exempt due to their classification as business transactions.
- Eligibility Criteria: To qualify for a buy-to-let mortgage, you may need to already own a property and have a solid one-year record of mortgage repayments without any issues.
The Journey to a Buy-to-let Mortgage: Steps to Follow
Embarking on the buy-to-let mortgage journey may initially seem quite daunting. Let’s break the process down into manageable steps to help make it less overwhelming:
1. Evaluating Eligibility
The first step in the process involves checking whether you meet the criteria for a buy-to-let mortgage. These criteria vary depending on the lender, but usually, include age restrictions and a minimum annual income, generally around £25,000.
2. Securing an Agreement in Principle
Getting an agreement in principle gives you an idea of how much a bank might lend before you officially start your mortgage application, without impacting your credit score. Often referred to as a ‘mortgage in principle’, it is valid for 90 days and signals to estate agents that you are a serious buyer.
3. Engaging with Your Bank
After securing an agreement in principle, the next step would be to engage with a bank or a mortgage broker to find the most suitable mortgage deal. During this phase, you will be discussing buy-to-let mortgage rates, affordability, and the different mortgage products on offer.
4. Mortgage Application
Once you’ve chosen the best mortgage deal, it’s time to apply formally. This process requires you to provide comprehensive details about your finances and the property you intend to buy. Existing landlords will also need to show bank statements evidencing rental income from other properties.
5. Waiting for Your Mortgage Offer
Typically, mortgage offers take between two to four weeks to come through. During this period, your bank will conduct a full credit check and organise property valuation for the property you have intended to buy.
Understanding Affordability: How is it Calculated?
Unlike residential mortgages, where affordability is evaluated based on salary and outgoings, buy-to-let mortgages focus on the potential rental income the property can generate. To decide whether the property will yield a good return on investment, you can calculate the rental yield – the annual rent as a percentage of the property’s value.
Deciding How Much to Deposit
Unless you are a cash buyer, you will need to arrange a mortgage which also means that you’ll need to fork out a deposit. The deposit for a buy-to-let property typically represents about 25% of the property’s value, substantially higher than the 5-10% required for a house you intend to live in. This deposit amount may increase up to 35% for riskier properties such as new-builds.
Interest-only or Repayment: Which is the Best for Buy-to-let?
In a buy-to-let setup, you usually have two payment options: interest-only or repayment loans. With interest-only loans, you’ll be paying off just the interest each month, allowing you to pocket more from your tenants’ rent payments. Meanwhile, repayment loans require monthly settlements of both the borrowed amount and the interest throughout the agreed loan tenure.
Navigating Buy-to-let Mortgage Rates
To secure the best mortgage deal, keep these tips in mind:
- Use comparison websites to explore the market
- Consult with a mortgage broker
- Understand the differences between fixed and variable interest rates
- Regularly review and improve your credit score if necessary
Last but not least, it is crucial to choose the right mortgage provider. There are numerous options, ranging from mainstream lenders like Halifax and Barclays to specialist lenders like West One and Landbay, each with their unique features and offerings.
Additionally, some might be considering changing their existing mortgage to a buy-to-let. Good news, it is indeed possible. However, you’ll have to navigate through the lenders’ specific criteria, which might require you to remortgage, potentially leading to early repayment charges.