Buy to Let

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On this episode of the Mortgage and Protection Podcast we’re talking all about Buy to Let mortgages with Graham Sharkey from Status Mortgage Services.

What is a Buy to Let mortgage?

A Buy to Let mortgage is designed for people who want to purchase property with the intention of renting it out to a tenant. They’re basically mortgages specifically designed for landlords and rental properties.

How is a personal Buy to Let mortgage different from a limited company Buy to Let mortgage?

Buy to let mortgages allow you to buy property in your individual name. But some landlords choose to set up a limited company and then purchase the property under the company.

That decision is normally made after taking some advice from an accountant. We would advise to always do this pre-purchase. The accountant will make recommendations on the structure the client should adopt based on their tax position and future plans.

From a lending perspective, the difference is that with a personal Buy to Let the client owns the property in their personal name. The mortgage is granted to the individual or individuals purchasing the property, whereas with a Limited Company Buy to Let means the company owns the property and the mortgage is taken out in the company name.

It wraps the ownership of the property in a company for tax reasons.That company doesn’t need to have been established for any length of time from the lender’s perspective, but it does need to have the correct SIC codes associated with it. These are tax codes specifically for holding and letting properties. We can help a client with this – It’s part of our advice.

Limited Company Buy to Let mortgages are a little bit more expensive on rates than a personal Buy to Let mortgage. However, the additional cost of that borrowing will usually be offset by the potential longer term tax savings as highlighted by an accountant. There are considerably fewer limited company mortgages to choose from. The legal work is also slightly more expensive for a purchase in a limited company.

Your property may be repossessed if you do not keep up repayments on your mortgage.

Some buy to let mortgages are not regulated by the Financial Conduct Authority.

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Our key aims are to fully understand what you are looking to achieve, create a solution tailored to your needs, deliver results through an excellent service and build a relationship for life.

Can anyone get a Buy to Let mortgage?

Anyone that can pass a lender’s credit score can get a Buy to Let mortgage – and credit scores would normally need to be strong to pass with most lenders. We do have access to a handful of lenders that will tolerate some adverse credit for Buy to Let, however.

With most lenders you’ll already need to be a homeowner, having an active residential mortgage is not a problem. The majority of lenders will also require you to meet a minimum salary requirement – usually £25,000, although some accept less.

Most lenders will usually require a 25% deposit as a minimum. Although again some lenders will accept smaller deposits of say 20% or even 15% deposit, but these will be more expensive products.

How much can I borrow on a Buy to Let mortgage?

Unlike residential mortgages where affordability calculations are based on the applicant’s earned income, the amount you can buy on a Buy to Let mortgage is based on the potential rental yield of the property.

It means that the monthly rental will need to meet the lenders ‘stress test’. These vary from lender to lender, but focus on whether you can still pay the mortgage payments from the rental income if interest rates increase, or if the property is empty for a few weeks or months of the year.

The client’s tax position – whether they are a higher or a lower taxpayer – could affect this equation. It can also vary based on the product type selected. So, for example, a five year fixed rate allows you to borrow more than a shorter fixed rate.

It can get very confusing, but your mortgage broker will analyse this for you and recommend the most suitable solution. The main point to know is that the greater the rental yield, the more you can borrow, up to a maximum borrowing level which is usually 75%.

What are the costs involved in buying Buy to Let property?

In addition to the required deposit, a Buy to Let purchase is subject to the same costs as a traditional residential purchase. You have the survey fee plus lender arrangement fees or booking fees relating to the mortgage product. You have a broker fee and the solicitors’ costs including the standard legal disbursements.

A large cost to consider is stamp duty because in addition to the standard charges, you’ll be liable for an additional three percent on the purchase price – as per the stamp duty rules when you own more than one property.

Once you’re a landlord you have many responsibilities in addition to monthly mortgage payments. You’re also liable for ensuring the property is safe to live in through repairs and maintenance. You also need to ensure a gas safety check is done by a qualified engineer annually, and an electrical safety check is required every five years. You’ll also need to ensure the building is insured – which we can help you with.

The tenant really is only required to pay for utility bills, contents insurance and council tax and obviously the all important monthly rental payment, which hopefully gives you as a landlord some level of profit.

Is it illegal to rent a house without a Buy to Let mortgage?

You’re not allowed to take out a residential mortgage with the blatant intention of letting the property out straight away. You do need a Buy to Let mortgage – or to purchase the property outright in cash.

Sometimes people buy a residential property and, after living in it for a period of time, their circumstances change. They might decide to keep the property but move out and let it to a tenant. In this situation, you have two options.

You can approach your existing lender and ask for permission to let. They will likely grant this in the short to medium term, but may charge a fee or change the rate. The alternative and more correct way of doing it is to remortgage onto a Buy to Let mortgage and repay the previous mortgage. It can then be let long term.

You must not rent out property on a residential mortgage without gaining permission to let from the lender. That would be a breach of your mortgage terms. We can advise clients on their options in a situation where they need to let their property.

Some buy to let mortgages are not regulated by the Financial Conduct Authority.

Speak To An Expert

Our key aims are to fully understand what you are looking to achieve, create a solution tailored to your needs, deliver results through an excellent service and build a relationship for life.

Is it illegal to live in your own Buy to Let property?

Again, if you live in your own Buy to Let property then you are in breach of the mortgage contract. The lender has underwritten the mortgage based on the expected rent generated – they haven’t assessed your affordability.

Therefore they won’t want you living in the property – so you can own it, but not live in it. It might seem strange, but that’s the rules.

Should I choose interest only or repayment on a Buy to Let mortgage?

This is down to the personal preference of the client. Most Buy to Let mortgages are taken out on an interest-only basis because it keeps the monthly payments lower. That makes it easier to suffer any void periods when the property might not be let out.

There’s an argument to use the profits from the rent of your Buy to Let to overpay and clear your residential mortgage first. Then you can turn your attention to the repayment of your Buy to Let mortgage.

As a landlord myself, I recommend remaining on interest-only and letting any surplus monies build up to cover any repair bills that arise. You can then make capital overpayments on the mortgage from time to time as a lump sum when the funds have reached a certain level.

Some landlords let the surplus build up and wait until they have enough for another deposit and expand their property portfolio. So interest-only is very much the done thing, but it is obviously down to your individual circumstances. There may be situations where we recommend repayment, but it’s less common.

Do I need a solicitor for a Buy to Let?

Yes, you need a solicitor for a Buy to Let mortgage in the same way as for a residential purchase or remortgage. If the property’s being purchased in a limited company name, the legal costs will be slightly higher because there’s a bit more work involved.

In that situation, the solicitor would be acting on behalf of the company – albeit you own that company. The lender will insist you need to sign a personal guarantee, at which point you need to take personal independent legal advice, separate from the company that’s dealing with the purchase. So that’s an extra cost to factor in.

How many Buy to Let properties can I own?

As many as you like! I’ve been doing this a long time and I’ve met some landlords with over 100 properties. How possible it is for you is heavily dependent on the capital you have available. As we touched on earlier, you need around 25% as a deposit. So if you can keep finding that level of funding, the question really is how many mortgages you can have with lenders. The high street banks generally prefer what we call non-portfolio landlords – that’s someone with three Buy to Lets or less. Once you have four or more you’re classed as a portfolio landlord and seen as ‘professional’.

There, we’re looking at a smaller group of lenders, who will have an upper aggregate total lending limit. To put that in perspective, someone like Paragon, a very strong Buy to Let lender, will comfortably lend you £10 million across your portfolio.

Where can I get advice on Buy to Let?

Buy to let lending is very complex and for most people this is a supplementary income – you probably have a busy day job too. We’re here to make it easier. We can even help you find a good letting agent – we have affiliated partners we work with.

Having a good mortgage broker on your side means you can run your business in a hands-off way, so you can focus on your day job. Not just when you purchase the property, but also when reviews are due.

Most of us at Status Mortgage Services are actually landlords ourselves or have been in the past, so we have experience in that role as well as the financial aspect. It means we can offer great advice and support. Just get in touch for an initial chat.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Some Buy to Let mortgages are not regulated by the Financial Conduct Authority.

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