Difference between Buy to Let and Residential mortgages
The significant difference between a Buy to Let (B2L) mortgage and a 'residential' one is that the lender bases what they can lend you on the potential or actual monthly rental income from the property, not your income. Although most lenders in 2012 will still want you to be earning a minimum amount, typically £25k per annum, albeit there are a couple of exceptions to this so don't be put off if you earn less. Again there are a couple of variations but most lenders will want the monthly rent you charge on the property to outweigh the monthly interest payment on their mortgage by 25%, some will base this on the payment on the rate they are charging you, some will have a set 'payrate' of say 5% and the rent must be 125% of the mortgage payment at this rate. Of course you will still need to credit worthy and pass a credit scoring or referencing process with the lender.
How much deposit do you need for a B2L?
Typically you will need to put down a larger percentage deposit for a B2L, some do offer mortgages where a 15% deposit is required but rates are high and lending is very limited, a few more come in at 20% but again options are few. Most lenders will want a 25% deposit and as with residential mortgages in the current market, the larger the deposit, the lower the rate.
Watch out for set up fees
One thing to be particularly careful of with this type of mortgage are set up fees, these are often a percentage of the loan (as much as 4%) and although the lender will give you the option to add these to the loan (or even insist you do, via a completion fee), you will of course pay interest on it so you need to budget for this in the overall cost of taking the mortgage. I have a client who purchases multiple small flats in Bedfordshire all costing less than £80,000, usually this means it costs him less on this type of product than one with a fixed fee (which can be up £3,000 anyway). I have another client who is just carrying out a £975,000 B2L remortgage, clearly a fixed fee is better for them.
I raised the issue of high fees with a senior person at a major B2L lender last year, his answer was that landlords were entering into this market to make a profit and therefore see high fees as a price worth paying in the long run, I would suggest that means there will be little change on this for now and experienced landlords do accept this. One important tip is to look beyond the headline rates from specialist lenders, many smaller building societies are in this market and offer decent rates with fixed fees.
The 3 types of buyers and how if affects their chances of securing a B2L mortgage
Buyers fall into three main categories:
- 'Experienced Landlords/Ladies' - these will have two or more B2L properties and acceptable to most lenders, unless they have more than 10, when their options become more limited.
- 'First Time Landlords', these are people that have a mortgage on their home but want to buy a property to let out or rent out a previous residence, again the majority of lenders will oblige.
- 'First Time Buyers', yes it is possible for your first purchase to be one for investment, several lenders will entertain this, but don't forget you will need to demonstrate you can afford it in the same way you would with residential mortgage.
The problem with student lets
Finally, make sure you pick the right property, as with all mortgages it needs to be habitable and each lender has different rules surrounding the type of property they will lend on. Be careful with Houses in Multiple Occupation (known as HMO's), these are often student lets where there are several tenancy agreements to be signed, rather than one for a family let. You may see these as a very good investment in a university town for example, but bear in mind how your property may be treated and what the neighbours may think. Only specialist lenders will help with these. As always a good broker will guide you through the maze and point you to the right lender as well as the right product.
