Getting a Buy to Let Mortgage A Useful Guide to Getting the Best Deals and Rates
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In last weeks’ blog I said I thought it would be worthwhile publishing a brief guide to buy to let mortgages.
So here is our short guide for investor landlords wishing to buy and let property. (Please note this is not a guide for people who might be classed as “property traders” (whose business is more about buying and selling property in a short time period) or “developers” (whose business is mainly about substantial renovations for developments with a view to sell rather than let out) though I hope they will find things of use to them here.)
In a nutshell, a buy to let mortgage is a mortgage which is used to purchase residential property that you will NOT live in.
The key difference between a buy to let mortgage and a standard residential one is that with a buy to let one, the lender is usually more concerned with the value of the property and how much it can be rented out for than how much you are earning (though if you DO happen to have good earnings from a day job that will mean you should have a better choice of buy to let mortgages to choose from.)
Rental Income Potential is A Key Factor
Lenders will want to know that the rental income you can achieve is more than the annual mortgage payment and the ratio that’s usually used is the rental must be equal to or more than 25% more than the interest payments on the mortgage (though some lenders want 30% more.)
Each lender has different criteria and some ask that you do have an income of at least £25,000 per annum – which can be on a self employed or employed basis. Self employed people may have to show at least one year of good accounts – i.e. more than £25,000 profit, and the business must be something other than property.
The minimum deposit you need to put down in most cases is 25%, though there are a few mortgages where only 20% deposit is required. However these are much more difficult to obtain, the interest rates are higher and you must be an experienced landlord and have a high credit rating to qualify.
It is advisable to get an agreement in principle in place from a lender before starting your property search so you will know that you are credit-worthy and the lender will be happy to lend to you. Also it means estate agents and property finders know that if they can find the right property you can move forward with the purchase quickly.
Credit Checking and Credit Scoring
Most lenders will use credit checking and credit scoring when you submit an application.
However, there are a couple of lenders now that don’t credit score, but they only offer mortgages to “experienced investors” at the moment. (An experienced landlord is usually defined as someone who has owned and let out at least one property for 3 years.)
Where a lender does not use credit scoring this could help those individuals that may have had some credit problems in the past – however the lender will want reasons for any problems, CCJs, loan defaults etc and information as to whether they have been settled. Interest rates will be higher.
You can buy a buy to let property when you do not own one already but you are very limited by the number of lenders available to you as lenders are now extremely wary when it comes to “inexperienced property investors.” Generally, it is always advisable to be a property owner or purchase with a property owner to get the best deals.
Most lenders like landlords with experience though Lloyds Banking Group (BM Solutions and Cheltenham & Gloucester brands) has rather bizarrely recently decided that they will no longer lend to landlords who have more than 3 mortgages with them across the group.
Things You Can Do To Help Yourself
Here are some things that can help you:
- Get your credit report
- Obtain an Agreement in Principle (an AIP) when you start your search
- Look at the overall mortgage not just the headline rate.
- If you use an independent broker, use one who is not tied to a specific lender and make sure they are regulated by the FSA.
- When getting purchase funds together ensure you include all costs including deposit, stamp duty, legal fees, mortgage costs, furnishings etc
- If using bridging finance to purchase property, always make sure you have a defined exit strategy (Bridging is not advised for inexperienced investors however it can be a good tool for an experienced investor who may need to purchase a property quickly, by exit strategy I am referring to a way to remove the bridging, this could be a buy to let mortgage or paying off the loan through sale of another property, but it is a good idea to know which route you are going to use as it can be an expensive form of finance and is only for a short term basis 6-12 months)
- It can be more difficult to buy with a buy to let mortgage if you do not currently own a property and also if you do not have a job.
- If looking at new build buy sildenafil citrate cheap property always check lender’s conditions on loan to value and property type
Post credit crunch, getting finance has got much harder as lenders have tightened their criteria. But if you plan ahead and get your finances straight before you start applying you stand a better chance of success.
MORE ABOUT LETTINGFOCUS AND WHAT WE DO
LettingFocus.com is the home of Private Rented Sector and Landlord Information.
I’m David Lawrenson, a landlord and property investor myself for over 25 years and author of “Successful Property Letting” – the UK’s top selling commercially published property book for the last 3 years. 25,000 copies sold.
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Primarily I am a consultant to a range of organisations including banks, building societies, local authorities, social housing providers, institutional investors in build to let and insurers – helping them with their landlord facing or buy to let product strategies, marketing and services.
For example, I help banks improve their buy to let mortgage lending practices and I help housing associations / local authorities find private landlords (private rented access schemes, local letting agency models etc.)
I also write for property websites and am regularly quoted by the media.
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We also find a limited amount of time to help landlords and property investors by coaching them in how to make money in the private rented sector using ways that work, which are ethical, fair to tenants and which involve minimal risk to the investor. We pride ourselves on giving independent unbiased Buy to Let Advice on a one-to-one mentoring / coaching basis or through our (very occasional) group seminars.
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Great lettings advice- this blog is an essential read to anyone planning to rent or let out a property.
I remember the last time we went to remortgage a property a well known high street retailer had put a charge against us. The terms they had agreed with my wife and the ones they actually gave were different and they had done this without our knowledge. We had to pay them money we felt wasn’t due just so we could remortgage, so I have to say getting a credit report is essential.
Chris