Buy to let lending is one of many considerations for anyone thinking about becoming a landlord.
Despite tax relief changes and stamp duty hikes, it seems things are set to get tougher still for buy-to-let investors, as the Bank of England have called for tighter borrowing rules and stricter affordability testing for buy to let lending in an attempt to’crack down’ on the market.
So if you’re thinking about becoming a landlord, you may be asking questions like “What is a buy to let mortgage?”, “how high are buy to let mortgage rates?” and “can I get a buy to let mortgage?”
We’re going to answer all of your questions and remove any confusion surrounding buy to let lending.
What is a buy to let mortgage?
A buy to let mortgage is a mortgage product created specifically for the buy to let market.
You need to take out a buy to let mortgage if you want to borrow money to purchase a property that you intend to let out, rather than live in yourself.
If you let out a property that has a standard residential, owner-occupier mortgage attached to it, without written consent from your mortgage lender, you are committing mortgage fraud.
How do buy to let mortgages work?
Unlike a residential mortgage, where the amount you can borrow is based on your annual income, the amount you can borrow to purchase a buy to let property is based on the amount you will be able to rent the property out for.
The deposit you need for a buy to let mortgage is likely to be significantly higher than for a residential mortgage (typically 20-40 percent for a buy to let mortgage), and the interest rates are also usually higher. This is because buy to let mortgages are seen to be more of a risk for the lender than a traditional owner-occupier mortgage.
Buy to let mortgage criteria – what you need to know
In 2017 changes were made to buy to let mortgage lending criteria, making it far more challenging for landlords with four or more mortgaged properties (referred to as portfolio investors) to take out new buy to let mortgages.
These changes were introduced by the Bank of England in an attempt to crack down on previous overzealous, and sometimes irresponsible, lending.
As part of the new buy to let lending criteria, lenders must now consider the applicant’s entire property portfolio when processing any application for a new buy to let mortgage.
This means there is increasing pressure on landlords to ensure each of their buy to let properties is performing well individually and offering a good return. Some lenders will also take into account your personal salary or annual income.
The new lending criteria means that any new buy to let mortgage application is likely to require a wide range of detailed supporting paperwork.
This may include details of current property portfolio and associated lending, details of rental income and related expenditure, company profits/annual income and copies of any company accounts.
The complexity of the application process means you can expect it to take a little longer than it used to. Experts advise that you should allow the application process to take up to three months.
Another change made to buy to let mortgage lending criteria has been the introduction of ‘stress testing’. Each application must show that the rental income will cover a minimum of 125 percent of the mortage repayments and that the mortgage repayments would still be affordable if interest rates were to rise significantly.
Best buy to let mortgages – how to find yours
The changes to buy to let lending criteria mean that some lenders have decided to stop offering buy to let mortgages altogether, and just focus on residential, owner-occupier mortgages.
This, of course, has a knock-on effect for landlords; less product availability means fewer competitive deals.
If you are keen to secure the best buy to let mortgage deal you can, a specialist buy to let mortgage broker is a great place to start.
A broker with expertise in the buy to let field will have up to date information about the latest products and rates available and will be able to offer in-depth advice, personalised to your individual circumstances.
What should I consider before applying for buy to let lending?
There are several factors to consider when beginning the process of applying for buy to let lending. These include:
- The size of deposit you require for a buy to let mortgage – buy to let lenders typically require a deposit of between 20 and 40 percent.
- The additional costs associated with buying a property that you intent to let, which will be higher than with a standard owner-occupier purchase. These include higher levels of stamp duty, higher mortgage product fees and higher interest rates.
- How much income you can expect to make from rental payments – most mortgage companies will refuse lending if the rental income is any less than 125 percent of the mortgage repayments.
Renting out a home you already own – changing mortgage to buy to let
If you decide to rent out a property that you have previously lived in, you will need to tell your mortgage lender straight away and change your mortgage from a residential owner-occupier mortgage to a buy to let mortgage.
Switching to buy to let mortgage should be fairly straight forward, if the rental stacks up financially. Similar to purchasing a new buy to let property, you will need to have at least 20 to 40 percent equity in the property (acting as your deposit), and the rent you can generate would need to cover at least 125 percent of the buy to let mortgage repayments.
For this reason it is a good idea to do your sums before you contact your mortgage provider so you have clear, up to date information to give them about.
Before you contact your mortgage lender, you may want to consider speaking to at least three local letting agents to get advice on the following areas:
- How much rent you could charge for the property
- What level of demand they think there would be for the property (so you can assess what sort of vacant periods you may have to contend with)
- The sort of management charges that would be payable
- What your practical and financial responsibilities would be, both in preparation for letting the property out and as a landlord
It is also worth looking over your current mortgage documents to assess whether an Early Repayment Charge (EPC) may be payable, should you change to a new mortgage product.
Do you always need to change to a buy to let mortgage if you want to let out your home?
The short answer to this question is “no”, but you must speak to your mortgage provider about your plans and get their approval to let your property.
Some mortgage providers will not require you to change to a new mortgage product, but will just increase your mortgage interest rate to cover the additional risk of your home becoming a rental property.
The benefit of this is that you will not be required to pay for a valuation or the usual new product fees that are payable when you take out a new mortgage.
You also would not be required to pay any Early Repayment Charge (EPC) for ending your current mortgage agreement before the minimum term has come to an end.
You should always get written consent from your mortgage lender, if they agree to your property being let. If you let out your property without written consent from your mortgage lender you will be committing mortgage fraud, which is a serious offence.
If your mortgage lender will not agree to let you rent the property out on your currently mortgage, your only option would be to pay any early exit fee and take out a buy to let mortgage on the property.
If you do not have enough equity in the property to secure a buy to let mortgage, or if mortgage lenders do not feel the figures are able to withstand the financial stress tests, you may not be able to secure buy to let lending.
In these circumstances you are left with two options: continue to live in the property yourself (if it is affordable and convenient to do so), or sell the property.
Danny Luke, Quick Move Now’s Managing Director, commented:
Buy to let lending can feel quite complicated, but it needn’t be.
As with any big financial decision, it is important that you seek independent financial advice, specific to your individual circumstances.
Buy to let property is a long term investment, and should be treated as such. It is vital that mortgage lenders thoroughly assess affordability and the risk attached to lending to any applicant – buy-to-let investor or owner-occupier – and be responsible in their lending.
It is also important, however, that would-be landlords are not put off by these thorough checks. When there is a shortage of rental property available, as in the current market, it is important that the financial industry does not dissuade potential landlords from purchasing buy to let properties.
The more rental property available, the better conditions will be for renters, and few renters can afford for rental costs to rise too much higher.