Buy To Let Mortgages
Buy-to-let (BTL) mortgages are specifically for individuals who wish to buy residential property which they intend renting to tenants.
Both residential and buy-to-let (BTL) mortgages share some similarities, as they are both products designed to finance property purchases. Here are the key similarities: – **Property Financing**: Both are used to finance the purchase of a property.
- Interest Rates: They both come with interest rates, though the rates may differ.
- Deposit Requirement: Both types of mortgages typically require a deposit, with the amount varying based on the lender’s criteria.
- Lender’s Assessment: Lenders assess the borrower’s financial situation for both mortgage types to determine eligibility.
- Legal Charge: Both mortgages place a legal charge on the property, which means the lender can repossess the property if repayments are not made.
- Repayment Structure: They can offer various repayment structures, including interest-only or capital and interest repayments.
It’s important to note that while they have similarities, they also have distinct differences, particularly in terms of eligibility criteria, interest rates, and the purpose of the property being financed. Residential mortgages are typically for properties where the owner will live, while BTL mortgages are for properties intended to be rented out.
Which type of mortgage?
Depending on the lender, the types of mortgages available to the BTL borrower are usually the same as those available to the standard residential mortgage borrower — i.e., tracker, discount, fixed rate, capped rate and variable rate.
Given that most BTL borrowers buy for reasons of investment, some mortgage options may be more appropriate than others. With a fixed-rate mortgage for example, the borrower knows exactly what their monthly repayments are going to be; other borrowers prefer tracker or variable rate loans where the monthly repayment can sometimes be lower, but the cost can vary from one month to the next.
(Many BTL buyers have a preference for interest only mortgages, as distinct to a capital and interest repayment mortgage. An interest only mortgage, is a mortgage where the monthly repayment is used solely to pay off the interest on the loan but none of the capital, which is repaid only when the property is sold.)
BTL Mortgages — associated fees and costs
Survey: A surveyor will be appointed (at the borrower’s expense) to assess the property’s condition, market value and potential rental income. The surveyor will also identify any issues which could affect the property’s future value.
Conveyance: Conveyancing — which is usually conducted by a solicitor or conveyancer — is the process by which the ownership (legal title) of the property is transferred from the seller to the buyer. The seller pays for this cost.
Stamp Duty for Buy-to-let property: The purchaser may have to pay stamp duty land tax which is calculated as a percentage of the purchase price of the property — see the table below for the 2020/21 tax year.
If the property price is less than £40,000 then there is no stamp duty payable.
Other costs: The borrower may also have to pay arrangement and booking fees to the mortgage provider, which tend to be higher than those associated with a standard residential mortgage. It may be possible to include some or all of those fees in the advance.
Interest Rates
Because BTL mortgages represent more of a risk for lenders than standard residential mortgages, BTL borrowers tend to be charged higher rates of interest.
Deposits
Typically, the highest loan-to-value (LTV) mortgage available on a BTL basis is 75% — i.e. you will need a deposit of at least 25% of the property’s purchase price to proceed. Borrowers who are able to put down substantially more than the minimum 25% deposit (40%+ for example) will usually qualify for more favourable rates of interest.
Affordability
When considering their decision to make an advance or not, lenders will also take into account the amount of rent the borrower is hoping to realise from the property. Unlike a standard residential mortgage, most lenders view the property’s rental potential — rather than the borrower’s salary — as the primary source of income for servicing the loan.
For that reason, BTL lenders like to see a situation where the rental income covers at least 125% of the monthly interest payment. In other words, if your monthly mortgage payment is £1,000, the monthly rent should be a minimum of £1,250. (The borrower’s projections in terms of rental income must be verified by an independent source.) The difference between the two figures should help you meet your mortgage repayments when no rent is being received, or when repairs need making to the property.
Credit Record
In common with a standard residential mortgage, the potential lender will take account of your personal credit rating. If you have any unpaid debts, County Court Judgements — or you have failed to make previous or existing loan repayments on time — the lender may not want to take you on as a BTL borrower.
Eligibility & Lending Criteria
Most banks and building societies (and some other financial institutions) offer BTL mortgages, but terms, conditions and costs vary enormously.
Some mortgage providers will not lend to individuals who are under 25 years of age or earn less than £25,000 a year. Lenders may impose an ‘upper’ age limit on the term of the mortgage by insisting that the mortgage is repaid in full before the borrower reaches a certain age — 70 is not untypical.
Flats, newly built property, former local authority-owned properties — or properties which are priced below a certain value — can be unacceptable to lenders. Lenders may also restrict the number of BTL mortgages a borrower can have with them at any one time. Or the lender may impose a ‘cap’ on the total amount of BTL funding they are prepared to advance to a borrower.
This information does not contain all of the detail you would need to choose a mortgage. Make sure you read your individual Key Facts Illustration (KFI) plus or the new European Standardised Information Sheet (ESIS) before you make a decision.
A KFI plus or ESIS gives you tailored information, based on a particular mortgage and the level of lending you require, which is important to help you make your decision. This includes associated rates and fees, the overall cost of the mortgage and your monthly payments.
Please note this does not constitute mortgage advice and the figures shown are purely a guide. The actual rate available will depend upon your circumstances. Please ask for a KFI plus / ESIS.
