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Author: Elliott Culley - Director & Mortgage Adviser of Switch Mortgage Finance
A Buy to Let Mortgage: A Guide for Investors
If you’re considering investing in property, a buy to let mortgage may be the right choice for you. Buy to let mortgages are loans specifically designed for individuals who wish to purchase a property for the purpose of renting it out to tenants.
However, it’s important to carefully consider the risks and responsibilities involved in becoming a landlord before taking out a buy to let mortgage.
What is a Buy to Let Mortgage?
A buy-to-let mortgage is a loan used specifically for the purpose of purchasing a property to be rented out to tenants. This type of mortgage is different from a standard residential mortgage, as the loan is based on the potential rental income generated by the property.
There are many different types of buy to lets including standard buy to let, house of multiple occupancy (HMO), multi unit freehold block (MUFB), Limited company buy to let, etc.
Mortgage lender’s criteria can be difficult to navigate and using a mortgage broker can help make the process smoother.
What are the Requirements for a Buy to Let?
To qualify for a buy-to-let mortgage, you’ll need to meet certain requirements set by the lender. You will need to pass the lenders income cover ratio test, which dictates how much you can borrow against a property.
You will also need to have a good credit score and mortgage lenders will also require a larger deposit than a standard residential mortgage.
How Much Deposit Do You Need?
The deposit required for can vary, but it is typically larger than a standard residential mortgage. A deposit of 25% is the standard requirement although some mortgage lenders may allow you to proceed with a 20% deposit.
How Much Can I Borrow For a Buy to Let?
When applying for a buy to let mortgage, you will need to pass the mortgage lender’s income cover ratio test.
Rather than simply prove that your rental income will cover your monthly mortgage repayments, the mortgage lender will stress test the potential mortgage payment to make sure the rental payment you receive can cover the mortgage payment if interest were to rise.
The income cover ratio is the calculation lenders apply to determine your affordability. It compares the amount you want to borrow with the amount of rental income you’ll receive and the interest you will have to pay on the loan.
Lenders require a ‘buffer’ in your rental income of either 125% or 145%, dependent on your tax status or how you are applying for the mortgage. This is applied to ensure a borrower has enough surplus income from the property to pay for repairs, non-payment of rent, service charges.
Lenders would then apply a stress test on top of this in case mortgage rates were to increase substantially.
Speak to an Expert!
Contact us today for expert advice and guidance on your unique mortgage and property needs. We will work with you on a one-on-one to basis to help you find the right solution for your needs.
With our experience you can rest assured that you are in good hands when it comes to securing the financing you need for your property.
Can I Get a Buy to Let Mortgage as a Limited Company?
It is possible to get a buy to let mortgage as a limited company. More landlords are taking this option due to the tax implications of declaring rental income. As a result for some clients it may be cheaper to purchase the property in a limited company.
If you are considering a limited company buy to let mortgage then you should note you may need a higher minimum deposit and interest rates may be slightly higher than a personal buy to let.
Can I Get a Buy to Let Mortgage As a First Time Buyer?
Mortgage lenders will approve buy to let mortgages for first-time buyers, but only under certain circumstances.
Not every lender will accept first-time buyers, as some will only offer buy to let mortgages to existing homeowners. Mortgage lenders will view you as high-risk, as you’ve yet to own a property and they will have concerns you may end up living in the property.
Finding the right mortgage lender first time saves time and money. Applying with lenders that aren’t suitable can result in you being declined, which can also damage your credit score.
What is an HMO Mortgage?
A House in Multiple Occupation (HMO) is a property that is rented to three or more unrelated tenants, that may share facilities and as a result will require a HMO mortgage. Rather than rent a property to a single household, an HMO allows landlords to rent the property to multiple households.
HMO mortgages work by allowing you to take a mortgage deal against a property, which is then repaid through regular monthly payments. HMO mortgages are usually only offered through specialist mortgage lenders
Can I get a Buy to Let Mortgage as a First Time Landlord?
A first-time landlord mortgage is a specifically designed for clients looking to purchase there first buy to let mortgage. Not all mortgage lenders offer mortgages to first time landlords so you need to make sure you apply with the right lender.
What is a Holiday Let Mortgage?
A holiday let mortgage is a specific type of buy to let mortgage which allows you to let out the property as a holiday let to paying guests. For this type of mortgage, you cannot let out the home to somebody on a long term basis.
Holiday let mortgages have become more popular since the staycation boom that came about in 2020 because of the covid pandemic as well as the squeeze on landlords via tax implications. As a result, more and more people are considering holiday let properties.
Why Use a Mortgage Broker?
When purchasing a buy to let mortgage, you’ll want access to the best products on the market. For this reason, we’d highly recommend having an advisor on board. Our specialists can find you a suitable lender and product which suits your objective and help you secure a mortgage in no time at all.
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