Buy to Let Mortgages
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Kevin Spear explains the mortgage process for Buy to Let Mortgages.
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What is a Buy to Let mortgage and how do they work?
Buy to Let mortgages are aimed at funding investment properties, for landlords who are buying properties that they are not going to live in themselves. They’re going to let them out to a tenant who will pay them rent.
The property might be part of someone’s long-term financial planning for a pension. The buyer might be a portfolio landlord, or they might be a first time landlord.
How is a personal Buy to Let different to a limited company Buy to Let?
Limited company Buy to Let is quite topical at the moment because of a tax change that came from HMRC two or three years ago. It was all about the tax treatment of high rate taxpayers and how much of a rebate they got on the cost of their Buy to Let mortgages.
We often advise people these days to use a limited company to buy the property, and raise the mortgage in that limited company’s name. Our client might be a couple or an individual. They would have a shareholding in that company as directors and shareholders.
There are some significant tax advantages with this limited company structure. A mortgage broker has the expertise to give you generic information from a tax perspective, and then we will refer you to a tax advisor or an accountant for the details.
Providers who lend to limited companies have a very particular sort of appetite for ‘Special Purpose Vehicles’ or ‘SPVs’ – this is a specific kind of limited company. They have a different cost structure for arrangement fees and rates and there is quite a big variance in that space.
How can I find a good Buy to Let mortgage deal?
If, for example, you took out a five-year fixed rate mortgage as a limited company, the arrangement fee can be anything up to 2% of the amount being borrowed. Some lenders will charge nothing but the rate is much higher; meanwhile, where you’ve got a 2% arrangement fee, the rate is much lower.
So we have quite a lot of research to do to assess those first five years and compare the costs. At Mortgage Marketplace we do a significant number of Buy to Lets both for individuals and limited company applicants, so we know our way around this space.
I’ve been in the Buy to let space personally now for 25 years and it has always been my passion, particularly living in Bristol where we’ve got a couple of universities, so there are lots of student lets which appeal to investors. It’s good to have a broker on your side who knows what they’re doing and has access to lenders with good rates and fees.
Can anyone get a Buy to Let mortgage?
Most lenders want you to have a residential mortgage in the background – in other words, you’re a homeowner. There are three or four lenders that offer ‘First Time Buyer, First Time Landlord’ deals but it’s quite a specialist area.
An applicant might be renting their residential home but wishes to invest in the Buy to Let space by buying an investment property. The mortgages for these clients tend to be a little bit more expensive and for slightly lower loan sizes against the value of the property – because it’s a higher risk transaction for the lender.
But most of our clients at Mortgage Marketplace are either experienced landlords or portfolio landlords, and we have a team ready with expert advice.
How Much Can You Borrow On A Buy To Let Mortgage And What Deposit Do I Need?
Deposits vary but they are generally more than in the residential space. The maximum Loan to Value we see these days is 80%. In other words, the loan represents 80% of the value of the property – which means you need a 20% deposit.
At that end of the market the rates and fees are quite high. If we step down to 75% Loan to Value, with a 25% deposit, we open up a lot more lenders with more competitive rates and fees. We generally advise clients to pitch for 75% if they’re able to. If you can get down even lower, the rates become even finer.
The other caveat is that lenders set an ‘affordability matrix’ based on the level of rent. The rent has to be a certain amount to justify the loan. Each lender has a special formula for how much rent services a certain level of interest. The team at Mortgage Marketplace are very experienced in working this out and, where needed, finding lenders with the most generous affordability calculators.
How Much Is A Buy To Let Property – What Are The Costs Involved?
Buying Buy to Let investment property is slightly different from buying residential homes. The stamp duty rates are higher on the basis that this is a second property. Our website has stamp duty calculators and you can see the difference in those levels of duty. It is something to be aware of because it applies to the second, third, fourth and all the additional properties that you buy – even if you are personally renting and buying investment property.
Typically, lenders charge arrangement fees as we mentioned earlier. In the residential space you will often get a good rate and quite a small arrangement fee, but in the Buy to Let space rates and fees are both higher because it’s a more specialist area of lending.
You’re also going to need a conveyancing solicitor in the normal way, and you will have to have the property valued or surveyed.
What is a stress rate?
Buy to Let lenders have what they call a ‘Stress Test’ and a lot of experienced landlords are quite familiar with the concept. New landlords will look at it and think that is quite strange and what on Earth does it all mean – plus if you put on top of that the fact that different lenders have different stress tests for different products and different types of property and different tax bands – then you can understand how it can be a bit of a minefield.
At Mortgage Marketplace we pride ourselves on knowing our way around that market very well. Our MD Kevin has been involved in the Buy to Let market now for about 25 years, when the concept of stress test work was introduced. Back then, it was simpler and it seems to have got more complicated, but we continue to know our way around it very well.
How Do You Calculate a stress rate?
There are a number of different stress calculations dependent upon lender and products. To put it simply it’s a calculation that’s designed to work out how much a lender will lend on a given amount of rent.
If you imagine £100 worth of interest charge coming from the lender, the lender will do a stress test that says how much the rent needs to be in order to cover that amount of interest.
The lender wants the interest covering plus a margin, and the stress test is what calculates the margin. So one of the margins the lenders usually want is for the rent to be 125% or more of the cost of the loan. You may say How do you calculate that interest charge? At what interest rate?
Typically lenders will use a range of between 5 and 5.5%. So if you’ve got a loan that’s being charged at 5.5%, it will give you a certain interest charge and the rent needs to cover that by 125%, for example.
In itself that might sound quite complicated and it’s further complicated by the fact that if you’re a high rate taxpayer that 125% margin goes up to something near 145% or sometimes 150%.
Is It Illegal To Rent Out A House Without A Buy To Let Mortgage? Is It Illegal To Live In Your Own Buy To Let Property?
If you go back ten or 15 years these types of things did happen and lenders are aware of it. An interest-only Buy to Let mortgage doesn’t cost much per month, so it can be tempting to go and live in the property. But this is completely against the terms and conditions of that Buy to Let mortgage.
I have come across people who are living in a property with a Buy to Let mortgage on it and the lender has wanted their money back. We’ve had to assist them because they’re in a bit of a panic. It’s definite no-no. Part of our screening process ensures that this doesn’t happen.
In terms of renting out a residential property, that’s a little bit more flexible. We will often find that someone with a residential property wants to move and keep their first home and rent it out. If they are partway through a fixed rate deal they don’t really want to have to repay that mortgage and incur early redemption charges to do it.
On behalf of the client we would approach the lender to ask for ‘Consent to Let’ on this property. The client can now go and get a new residential mortgage for their new home. So, you can have a standard residential mortgage and let it out with the permission of the lender. At the end of the product period, the residential mortgage will need to be repaid with a suitable Buy to Let mortgage.
Is It Better To Choose Interest Only Versus Repayment On A Buy To Let Mortgage?
When we do the affordability matrix for the Buy to Let Mortgage, comparing rent to size of loan, that’s always done on an interest-only basis. We’re only looking for rent to cover interest, and the formula is quite generous in that regard.
But often the total rent will cover capital repayment on a particular loan, not just the interest. A portfolio landlord, or an experienced landlord with several properties, tends to choose interest-only, because the extra cashflow from the rent can be stashed away ready to buy the next property.
Individuals who only have one or two properties, where it really is about investment rather than running it as a business, may prefer a capital repayment mortgage. That way, the loan is reducing over time, eventually down to zero.
The good thing about the Buy to Let space is you’ve got the choice. What we recommend depends on the clients’ objectives, their experience and what they’re seeking to achieve over the short, medium and long term.
How Many Buy To Let Properties Can I Own?
There is no cap on the number of properties legally, but lenders do have caps on numbers of properties or size of loans.
A lot of lenders will top out at a total property value of £2m or £5m if you’re a portfolio landlord, after which you need to go elsewhere to borrow for more property.
Where we’ve got significant portfolio landlords, people with 15-20 properties or more, we offer a more specialist, bespoke service to get them portfolio funding. In other words, we would approach a specialist bank that deals with portfolio landlords and get them a group facility.
This is an amount of money secured on a number of properties, rather than one mortgage on one property.
The benefit of that sort of facility is that you can negotiate. Once you pay one set of fees you can then use the money in different areas of your portfolio to do different things. That might be acquiring and upgrading property, for example. It’s more of a sort of commercial lending proposition that I’ve been actively involved in for quite a number of years now.
How Many Properties Do You Need To Own To Become A Portfolio Landlord?
It’s not actually that many. Most lenders will say either four or six qualifies you to be a portfolio landlord. When you’re acquiring your fifth property or your seventh, a lot of lenders will put you in that bracket. That doesn’t make it any more difficult to get a mortgage – if anything, it’s a little easier. Lenders understand that you have a level of experience and liquidity. Lenders are competing for that business because it is less risky for them.
That means the rates are more appealing, as is the fee structure. It’s a market where rates change much more frequently to try and attract business.
Growing your portfolio is exciting – I work with clients over a number of years and see that portfolio grow and it’s fun. It’s part of the reason why I’m in this space – I really enjoy it.
What Other Advice Do You Have On Buy To Let Mortgages?
One thing that has become quite significant and that new landlords need to be aware of is that a lot of local authorities now issue licences for what we call HMOs – houses of multiple occupancy – and for portfolio landlords.
Another element is the EPC rating, which assesses the environmental impact of each property. EPC ratings go from A to G, with A being good. A lot of lenders will look at an EPC rating of A to C and style the lending as a ‘green mortgage.’ Funding for those types of properties is straightforward.
If your EPC ratings are D, E or F, that takes out some of the lenders we can approach. They now favour more environmentally friendly investment property. Typically, that means newer property. If you have an EPC rating of F or G, again, the lending pool shrinks more.
This has been the case now for about 12 months now, and creeping in gradually. I’m not sure whether it’s a marketing thing or a risk modelling thing from the lenders, or a bit of a fad.
Clients need to be aware of this when looking at investment properties. For example, if you’ve got cement walls instead of cavity walls, that gives you an F straight away and there’s not much you can do about that. From a funding perspective that could cost you a little more, and make the property more difficult to sell in future.
It’s a move in the right direction from an environmental point of view, but it’s challenging from an investment property perspective – particularly in Bristol where we’ve got an awful lot of Victorian properties with sash windows. It’s certainly something for landlords to discuss with agents and lenders.
Generally, Buy to Let is a specialist space and you will always benefit from a good broker’s knowledge. The finance is quite complex and there can be a big difference between the most suitable deal and the average deal. So get in touch and let us help you.
Your property may be repossessed if you do not keep up repayments on your mortgage.