What is a buy to let mortgage?
A buy to let mortgage is a mortgage secured on a property that you plan to rent out.
For many in the UK a buy to let property is an attractive proposition for plenty of reasons:
- Income from the rent
- Potential increases in property value
- A good source of income into retirement
When researching where to purchase a buy to let property is important to check the rental income the property can be expected to generate. This is an important factor both for the investment and the mortgage.
As well as the obvious advantages of buy to let properties. It is important to be aware of potential implications. The property increasing in value is not guaranteed, the value could stay the same or even decrease and if indeed the property does increase there will most probably be capital gains tax when you sell. There are also additional stamp duty obligations, in most instances you will have to pay an additional 3% stamp duty as a landlord by virtue of being an additional property owner.
Buy To Let Guide:
Buy to let mortgages are completely different to residential mortgages, and lenders all have their own criteria quirks.
- Deposit – Most lenders require at least a 25% deposit
- Affordability – Conversely to residential mortgages. Most mortgage lenders don’t scrutinise your personal income with a fine tooth comb and are more interested in the rental value of the property.
- Rental Requirements. Lender’s all have different calculations, they will assume the mortgage is interest only, apply a stress test to this rate and require that the rent covers this and then some.
£200,000 mortgage, stress tested @ 5.5% = £11,000.
Divide £11,000 by 12 for monthly stress tested interest = £916.66
Required coverage 140%. £916.66 x 140% = £1283.33
The exact figures depends on a whole host of variables, such as: your tax bracket, how many years the mortgage will be fixed for, whether you are buying or re-mortgaging etc….
- Income – Whilst the majority of lenders won’t scrutinise your income, they do generally have minimum requirements. A common requirement being that you earn at least £25,000 per annum
- If you do not earn £25k, do not despair. There are plenty of mortgages available providing you earn ‘an income’, even if the income is derived just from rent.
- Tenancy Types: Different lenders have different requirements. Some lenders don’t lend to certain tenants, some insist on an AST ‘Assured short hold tenancy’ of no longer than 12 months etc….
Can my income support the buy to let?
Possibly. If you have a high income and/or few commitments it may be possible to ‘Top slice’ using your excess income to make up for any rental shortfalls.
In short there are so many variables and quirks with buy to let mortgages it is best to speak with a qualified professional who can discuss your circumstances and provide you with a more definitive idea of how much you can borrow and what the likely costs will be.
First Time Buyer Buy To Let
Although buying your first property to let it out is unusual, it is not unheard of. There are situations where this is perfectly feasible. For example, you may live and work in an expensive part of the country such as London where house prices are relatively high. However, you may still have a healthy deposit and good income to support a buy to let mortgage and this is a good avenue to allow you to establish a footing on the property ladder.
Providing you have at least a 20% deposit and subject to meeting lender’s affordability criteria this can still be achievable. Give us a call so we can run through the scenario and see whether this is an option.
*Your property may be repossessed if you do not keep up repayments on your mortgage.
*Not all Buy to Let Mortgages are regulated by The Financial Conduct Authority
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