Unless you’ve inherited a fortune, you’ve got a massively well-paid job or you’ve cashed in your pension pot, you’re likely to need to borrow some money to buy your first rental property. What you need is a buy-to-let (BTL) mortgage.
Fortunately, banks are very keen to lend to landlords; unfortunately they were forced to introduce tougher lending criteria on 1 January 2017, so it isn’t as easy to get a BTL mortgage as it once was, but if you’ve found a great property with a good rental yield, you shouldn’t have too much difficulty.
To help you work your way through all the different products on offer and to find the best deal, you should probably start by consulting a mortgage broker.
Some brokers will charge you a fee, usually around 1% of the value of the mortgage, when you complete the property purchase, others work purely for the commission they’ll earn from the lender. In my experience, those who charge a fee offer a better service.
What income do you need for a buy-to-let mortgage?
To qualify for a buy-to-let mortgage you’ll need an income from your day job of around £25,000 to £30,000. This varies according to the lender, some ask for an income of up to £40K. This must be in addition to any rental income you expect to receive.
Deposits for BTL properties
You’ll also need a deposit of 25% to 30% of the purchase price of the property. Some lenders will accept a lower deposit of 20% or even as low as 10%, but the less cash you put down, the higher the interest rate you’ll pay. Lenders’ best rates are for BTL loans of less than 60% of the purchase price
Your deposit could come from savings or you could remortgage an existing property to release some equity. Any borrowings that are exclusively for your BTL qualify for tax relief or, from April 2017, tax credit.
Note that The Mortgage Works, one of the biggest BTL lenders, has just reduced its loan-to-value BTL mortgages down from 80% to a maximum of 75%.
Unlike residential mortgages which are now mostly repayment, BTL mortgages are generally interest-only.
You will need to prove that your rental income will cover your mortgage interest payments plus at least an additional 25% for other costs such as letting agents’ fees, service charges and maintenance at an assumed interest rate of 5%, even though the actual interest rate you’ll be paying might be much lower. This is because banks need to make sure that you’ll still be able to afford your BTL mortgage if interest rates rise.
Most properties are suitable for BTL mortgages, but some are more difficult to borrow against than others and lenders usually charger higher interest rates for properties that are seen as riskier investments.
BTL properties that might be more difficult to mortgage include flats above shops, particularly restaurants, cafes and takeaways because of the increased fire risks, flats in tall tower blocks, especially those made of concrete, ex-local authority properties on estates where the majority of properties are still council-owned, flats with ‘deck’ access and properties with short leases.
For a property to be eligible for a BTL mortgage, it must have a functional bathroom and kitchen, but these can be very basic.
Typical interest rates for buy-to-let mortgages are 3% to 4%, which is not bad and you might be able to find a BTL mortgage for around 1.5%, but bear in mind that you’d be doing very well if you got a return of more than 7% on a rental property and you’ll have other costs, including finding a tenant and maintenance. You should also expect to have at least 2 weeks a year without a tenant and no rental income.
Most BTL mortgages also come with product fees, which can be as much as £3,000. Lenders have some fee-free mortgages, but these usually have higher interest rates. If you are planning to take out a large loan for a long period, one with a high fee but lower interest rate might make sense, but if you only need a small, short-term loan, you might be better off with a fee-free mortgage.
Other things to look out for are early redemption fees, valuation fees and solicitor’s costs.
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