Many first time Buy to Let property buyers are daunted at the thought of arranging finance for their purchase. Even existing landlords with an established property portfolio can sometimes be put off by the ins and outs of the Buy to Let mortgage market, as both market conditions and lender policies inevitably shift over time.
Taking out a Buy to Let mortgage needn’t be intimidating, but it can help to have a bit of understanding about how they work and what to expect when you apply for one, particularly if this is your first step into the world of Buy to Let property ownership.
Factors To Consider Before Taking Out A Buy to Let Mortgage
Many of us have at some point or other held a residential mortgage for our home, and it would be easy to assume that Buy to Let mortgages work in much the same way.
At the most basic level, they are very similar. The lender gives you a loan to finance the purchase of the property, against which the lending is secured. Interest is charged on the amount borrowed, and you make a monthly payment to the lender to cover the interest charge. In the event of defaulted payments, the security held against the property would allow the lender to repossess it. So far, so similar.
However, Buy to Let mortgages represent a higher risk to lenders, not least because tenant arrears or periods where the property is vacant may affect the landlord’s ability to meet the mortgage payments. Because of this higher risk factor, Buy to Let mortgages differ from residential mortgages both in terms of the application criteria, and in their pricing.
It’s an unfortunate but inescapable fact that you’ll pay more for a Buy to Let mortgage than you would for a comparable residential mortgage. Arrangement fees are generally higher (sometimes considerably so) as are interest rates. You should also expect to have to put down a larger deposit; usually a minimum of 15 per cent of the property value, while a deposit of 25 per cent or more may be required to qualify for the better Buy to Let mortgage deals.
Buy to Let mortgage applications
Another way in which Buy to Let mortgages differ from their residential counterparts is in the criteria lenders use to assess the mortgage application. While residential mortgage applications usually take account of employment status, income and expenditure figures (as well as the usual credit reference checks), Buy to Let mortgage lenders will more often base their decisions on consideration of the property’s projected rental income.
Some lenders may use a combination of approaches, for example looking at the projected rent but also requiring the applicant to have a verifiable salary or income over a certain amount.
A common approach amongst Buy to Let lenders is to require the rental income to exceed the monthly interest-only mortgage payment by a certain percentage. For example, if the mortgage payment is £650 per month and the lender requires a minimum 25 per cent margin, then you would need to show that the property could bring in a monthly rent of at least £812.50. The lender may ask a local property surveyor to provide confirmation of a reasonable rental income figure for the property and area.
As a mortgage is secured against your home or property, it could be repossessed if you do not keep up the mortgage payments.
Some types of buy to let mortgages are not regulated by the Financial Conduct Authority.