Buying a property to let can be an advantageous investment opportunity, but anyone requiring a mortgage to make the purchase should be aware that a residential mortgage cannot be used. Instead, investors will need to apply for a buy to let (BTL) mortgage. BTL mortgages have slightly different rules to residential mortgages and operate on strict criteria.
Who is eligible for a BTL mortgage?
Usually, those eligible for a BTL mortgage will be those who already own their home, either outright or with a mortgage, although there may be circumstances when those who rent or even first time buyers can take out a BTL mortgage.
The lender will assess the financial situation and will usually only lend to those earning over £25,000 a year. They will also check the credit rating to make sure the applicant is not overstretched with debts elsewhere. Many lenders will also only lend to younger applicants, typically under 45 – 50 years of age. This is because a mortgage term is usually 25 years and they do not want the applicant to be over 75 before the term ends.
What is the difference between BTL and residential mortgages?
BTL mortgages represent a bigger risk to the lender than residential mortgages, so fees and interest rates are usually higher. You will also need a larger deposit. Typically, this is 25% of the property price, although anywhere between 20% and 40% is normal.
BTL mortgages usually have interest-only repayments. This means that the monthly payments are likely to be lower than a residential mortgage with capital and interest repayments. However, borrowers must be aware that they will need to pay off the capital at the end of the term. Often this is done by selling the property, but as property prices can fall, a sale may not generate enough to repay the capital.
Where to get a BTL
Most of the major banks offer BTL mortgages and you may also find some
specialised lenders. A comparison website is a good place to start when
considering which lenders you might approach, although it is also a good idea
to discuss your needs with a mortgage broker to find the best deal.
The amount you will be able to borrow will depend on how much income you can
expect the property to generate. Finding out how much similar properties in
your area charge will give an idea of how much you will likely be offered. As a
general rule, lenders like the rental income to be 25-30% higher than the
mortgage repayments to cover the costs of voids (when the property is not
occupied) and maintenance.
Accidental landlords
Not every landlord has planned to be one. A change in circumstances such as a
job in a new area or moving in with a partner, may mean a previously
residential property is now up for let. Under these circumstances you must
inform your mortgage provider. Failure to do so may invalidate your mortgage.
What happens next will depend on the lender. Some will insist on a BTL mortgage
with a new lender, while others may be happy with a ‘consent to let’ on your
existing mortgage deal.
Proceed with caution
Letting out a property does not guarantee an income. No tenants or bad tenants
may mean periods of no income, while at other times maintenance such as a new
boiler can take up all the income and more. Property prices can go down as well
as up, so although the potential for profit is certainly there, it is not
guaranteed.