Buy To Let
If you want to purchase or already own a property that you want to rent out, you will require a BTL Mortgage or permission (consent to let) from your current lender to do so. BTL is often deemed higher risk to lenders than Residential Mortgages, so often are charged at a higher interest rate.
This is because lenders feel you are much more incentivised to repay the Mortgage on your own home than on an Investment. For this reason, lenders are also much stricter when Mortgaging BTL properties. If you meet one of the following criteria, it is strongly advised that you speak with a Specialist Mortgage Advisor, to ensure you are getting the cheapest product available to you:
Specialist Buy to Let Mortgages
- First Time Buyers – most lenders will want to see that you have or do own your own home before being prepared to lend to you on a rental property
- First Time Landlords – even if you do own your own home, many lenders will be stricter when lending to those with no experience of being a Landlord
- Consumer Buy to Let – if you have previously lived in the property or have inherited it and wish to rent it out, many lenders will consider you an accidental Landlord. Meaning the way your application is dealt with is treated differently to that of an ordinary BTL Mortgage.
- House of Multiple Occupation (HMO) – each lender defines this differently, but essentially if 3 or more non-relatives will be renting your property, there is a good chance the lender will define this as an HMO. Not every lender will Mortgage HMO’s and when they do, they will tend to charge a higher rate of interest and criteria will be stricter on things such as First Time Landlords.
- 80% Loan to Value or more (20% deposit) – the average deposit lenders require for BTL Mortgages tend to be 25%. So if you have less than this, not every lender is going to be available to you.
- Limited Company BTL’s – Rental properties which are owned and Mortgaged in the name of a Limited Company – usually for tax purposes.
- Adverse Credit BTL’s – Tends to be trickier obtaining a BTL Mortgage when you have previous Bad Credit, but there are still options
The above cases are all niches that not every lender will be prepared to lend on. Our Mortgage Advisors Specialise in the above, so if you require individual advice, please get in touch via our short contact form.
If you require more general information on the above points, we delve into this in further detail below.
Capital & Interest Repayment; Like a residential you can repay the capital on your Mortgage as well as paying off the interest. Although many prefer to opt for Interest Only, where you don’t repay the Mortgage and instead just pay the Interest incurred for the month.
Usually the reason for this is to maximise the profit from the rent. You will of course still need to repay your Mortgage when you get to the end of your Mortgage term. In many cases, this can be done by simply selling your rental property if you haven’t got any other provisions to use.
How lenders calculate how much you can borrow:
The nitty gritty, if you want to know; Lenders will calculate how much you can borrow on a BTL by using something called the Interest Cover Ratio. This is the minimum ratio between the anticipated Rental Income and a Lenders stress test interest rate. The lender will assume a Mortgage rate which is likely to be higher (stress test interest rate) than the rate you will actually be paying, 5% for example. Any rent will then have to cover the Mortgage payments, that are being based on this 5%, by around 125%-145%, dependent on the lender.
Using earned income to top up how much you can borrow:
First Time Buyer BTL’s
There are still options though, mostly with Specialist lenders. Two Specialist Lenders will accept First Time Buyers with just a 15% Deposit. And if you have a 20%-25% deposit, you will even be eligible to some mainstream lenders.
First Time Landlord BTL’s
This will be acceptable to most lenders up to 75%-80% loan to value. With two Specialist lenders only requiring a 15% deposit.
However, if you are looking at renting out a property that will be tenanted to 3 or more individuals that are not family members. The property then might fall into a category known as a House of Multiple Occupation. Which would be unacceptable to a lot of lenders. So this is something worth considering and speaking to a Specialist Mortgage Advisor about, before getting too far into the process.
House in Multiple Occupation (HMO)
Lenders each have their own rules as to what they consider an HMO to be. Most Specialist Lenders will consider an HMO to be a property rented out to 3 or more individuals that are not family members. But many mainstream lenders will classify a HMO as a property occupied by 5 or more tenants.
The key difference between an ordinary rental property and an HMO, is the lenders criteria tends to be slightly stricter for HMO’s, such as the Interest Cover Ratio (mentioned above) tends to be harsher. A larger deposit is often sought, and Lenders Interest rates and fees will often be more expensive.
Most lenders will require a 25% deposit; however some will allow a 20% deposit and one Specialist Lender will allow just a 15% deposit.
If you’re a First time landlord, options will be limited to just a handful of lenders. However, one mainstream lender will potentially allow you to purchase a HMO that will contain 4 individual tenants. Providing they are all under one tenancy agreement and have a 25% deposit.
Consumer BTL (CBTL)
Lenders will often each interpret the definition of a Consumer BTL (CBTL) differently.
The general definition is when the property owner has unwittingly become a Landlord (an Accidental Landlord). For example where the landlord of the property has previously lived in or inherited the property and then has to rent it out.
Lenders have an obligation to provide greater protection to these borrowers, the same way they would to a Residential borrower.
As above, each lender will classify CBTL differently, and some lenders will just require confirmation from the Applicants that the property is being rented purely for investment purposes.
This will then override the obligation for the lender to provide extra CBTL protection to the applicants. The key benefit of this is the Application process shouldn’t be as strict, as the Lender doesn’t have to apply the same protection as they would a residential application.
Most lenders will require a 20%-25% deposit for CBTL’s. However, one specialist Lender will accept a 15% deposit.
Mortgage Lenders generally, require a 25% Deposit on BTL Mortgages. However, in the last couple of years, as lenders compete for your business, they have begun to slowly decrease the required deposit to 20%. With three lenders decreasing this to 15%.
Again, the reason lenders require a larger deposit is down to risk. Rental properties are riskier to lend on than Residential Properties, as Lenders find you are much more likely to want to repay the Mortgage on your own home, should you get into financial difficulty, than you would on an Investment property.
Limited Company BTL’s (Ltd Co BTL)
New taxation rules phased in over over the last few years by the government has resulted in profits being limited when compared to previous years. Owning property within a Limited Company can help Landlords increase profitability by decreasing their tax liability.
Firstly, the key positives of holding property within a Limited Company:
- For individuals, the amount of tax relief you can claim on your income has been cut back. These changes do not affect Limited Companies.
- When reinvesting your Profits back into your Property Portfolio, no income tax will be payable, just corporation tax. This includes renovating your existing portfolio or purchasing additional properties.
- You can release £5,000 in dividends from your Limited Company, tax free. As this will be your dividend tax free allowance
- The tax you pay will be lower if you are a higher rate tax payer, or your portfolio income will throw you into this band. Corporation Tax will be 18% by 2020 on your profits, where as Income tax is 40%, on higher earners.
Secondly, the main cons of holding property within a Limited Company:
- Interest rates and fees tend to be more expensive
- The number of lenders prepared to lend to you, will be reduced and consist of mainly Specialist Mortgage Lenders.
- Individuals selling property have a Capital Gains Tax allowance of £12,000. Limited Companies do not have this allowance on the profit they make on the sale of their Buy to Lets.
- Higher Admin costs; costs will be higher on essential things such as Legal and Accounting Costs
You should always speak to an Accountant and a Mortgage Advisor which specialises in Ltd Co BTL’s before deciding that this will be the right option for you and your portfolio.
Buy to Let with Bad/Adverse Credit
One default or CCJ may be permitted up to 75% loan to value when the adverse was registered more than 6 months ago and less than £250.
Most lenders will be available once the adverse has been registered for at least 3 years.
Debt Management Plans may be permitted when more than 12 months old.
Unsecured Credit Arrears
Simply have a question or need to get moving. Next steps?
If you’re case is one of the above and you don’t know what to do next, don’t worry, we can help. As Specialists in these areas, we have access to all Specialist Mortgage Lenders.
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