Buy to Let – Frequently Asked Questions
The benefits of Buy to let mortgages
Buying a property to let can benefit the private landlord in two ways. Firstly, it can provide a stream of income. Secondly, many Buy to Let landlords purchase property because of the potential for long-term accumulation of capital growth. This section provides guidance about how to take out a successful buy to let mortgage, the pitfalls that may occur and the knowledge needed to avoid them.
What is a buy to let mortgage?
A Buy to Let mortgage refers to a loan that is used to purchase property in order to let it out. A buy to let mortgage is typically interest-only, and available up to 75 per cent of the value of the investment property. A single buy to let loan may be used to purchase more than one property.
What type of loan is a buy to let mortgage?
In the past, a landlord wishing to take out a mortgage on a property for the purpose of producing an income would be viewed by a lender as having a commercial interest. This used to result in higher rates of interest for borrowers seeking to buy to let. However, recent lender policy following general housing market expert consensus, is that the private rental sector should be encouraged to grow as much as possible. The lending criteria have been changed, and interest rates for private investors in property have been lowered under a new buy to let initiative. Buy to let loans are typically available at slightly higher rates than standard owner-occupier mortgage deals.
What type of return could I expect from an investment property?
Before taking into account all of the costs of letting, which can soon add up, the gross return should be between 7 per cent and 10 per cent. Capital appreciation is likely to match, if not exceed, inflation rates for the near future. The rents that you make should be approximately 130 per cent of the monthly mortgage repayment as a minimum, in order to cover all of the potential costs.
Should I take on a letting agent?
The advantages of taking on a registered letting agent are numerous. They will know how to communicate with lenders. Furthermore, they will know the market in the area in which you are buying. This can be essential, because the type of property you buy may determine how much you can rent it for and the type of people who rent it. Knowing how high the demand for properties of each type are is part of a letting agent’s job. A letting agent may also be able to advise you on the standard of decoration necessary, including what fittings and furniture you need to provide. The letting agent should be able to find respectful tenants who pay on time every month. Furthermore, if you place your property in the hands of an experienced professional letting agent, lenders are more likely to approve your application.
If you do decide to use a letting agent to manage your property, it is almost certainly advisable to choose one who is registered with ARLA (the Association of Residential Letting Agents.)
I would like to buy to let, how do I go about it?
The first step in the buy to let ladder is finding an appropriate property. Once a property of appropriate price has been found, it is necessary to assess whether it has the potential to be let out, how much can be expected in terms of rental yield (dependant upon a variety of national and local factors) and whether the property needs new fixtures and fittings in order to attract the right type of tenants. Once you have found a property for sale, you will need to arrange a buy to let mortgage.
How is a buy to let mortgage loan arranged?
A Buy to let mortgage does not differ massively from a standard private owner-occupier mortgage. Borrowers taking out Buy to let mortgages are subject to standard checks.
If you have an ARLA member agent responsible for letting and managing your property, the rents achievable from your investment property may be able to be taken into account when the lender assesses your situation. The criteria do, however, vary from lender to lender.
Generally speaking, most lenders will require your rental income to be 130 per cent of mortgage repayments. For example, if you were paying off a buy to let loan of £500 per month, you would need to be clearing rent of £650.
What should I look for in a buy to let mortgage deal?
Most lenders will expect that the rental income on the property will exceed the mortgage repayments. The level at which this becomes acceptable varies between lenders. Some lenders will consider the rental income, whereas others will only be interested in your standard income.
Fixed rate buy to let mortgages allow the borrower to pay a set rate for a fixed period, usually between two and ten years. The advantage of a fixed rate mortgage when buying to let is that you can calculate exactly what your future costs are going to be. It is certainly worth being aware of the penalties for early repayment that are included in some buy to let mortgages. Some mortgage lenders offer a flexible deal that allows you to overpay, underpay and even take payment holidays without any penalty fee being incurred. There are an enormous variety of different loans on the market, generally extending for between five and 40 years and between £15,000 and £1 million.
When looking for a buy to let mortgage deal it is worth looking at both the headline interest rate and the APR (Annual Percentage Rate), which should include all set up fees and administrative costs. You should be thinking about flexibility: does the loan allow early repayment and what will happen if you face a long void period. You should also be aware of the possibilities of remortgaging. It is common practise amongst landlords to free up capital by remortgaging and using the savings to help buy further properties.
Does my credit rating influence my buy to let mortgage loan application?
Although in theory a buy to let loan is secure because of the rental yield and the capital value stored in the property, in reality the higher the risk you represent to the lender the higher the interest rate is likely to be.
What types of buy to let mortgages are available in the UK?
Some lenders may offer other buy to let mortgage loans, but this list details some of the most common types:
Fixed Rate Buy to Let Mortgage
Interest Only Buy To Let Mortgage
Variable Rate Buy to Let Mortgage
Capped Buy to Let Mortgage
UK Limited Company Buy to Let Mortgage
Non Resident Buy to Let Mortgage
What should I look for in an investment property?
Firstly, it is imperative to not allow personal taste to cloud your judgement. The first question should be: will a range of people who live in this area want to rent this property out? The property is not for you to live in; it is for tenants to rent for a fixed period.
Talking to a letting agent will allow you to gain an appreciation of the area in which you intend to buy. They will know the specifics of the market, including which properties are in high demand. A general rule of thumb (although this may vary from area to area) is that purchasing a smaller property in a town (such as a one-bedroom or studio flat, or two-bedroom apartment) is almost always a sound investment. This does of course vary from property to property.
Buying to let for the student market is certainly a viable option in university towns. However, student rents are generally lower, and it may be worth bearing in mind the condition of the property after years of student occupancy.