Buy to let mortgage


Buy to let mortgage

21 Aug 2020

As per latest Rightmove house price index, the housing sector witnessed positive growth in sale in the post lockdown phase as the home movers are putting their property on the market and have agreed more sales than in any month in over 10 years time, of worth record total of over £37 billion and buy to let mortgage.

The increase in activity is not just due to the stamp duty holiday, it is up in the first time buyer category, even in the second stepper and other sectors. The data finds 44 percent more properties are coming to market as compared to a year ago, although, there exists a huge regional variation.

In terms of product choice, the buy to let (BTL) sector has been resilient in the residential market in the UK in the last 6 months. The number of deals available has reduced and the number of prospective tenants increased to a year – on – year high.

The trends indicate that at the time of economic uncertainty, people delay their financial commitments like purchasing homes, resulting in an increase in the rental demand. The reason for positivity in the sector is driven by the low average 5-year and 2-year rates that are 3.11 percent and 2.72 percent, respectively.

The buy to let mortgage rates are competitive in the current low base rate environment that shows the lenders are interested in getting offers from the sector.

What Is a Buy to Let Mortgage UK?

There are many risks involved in investing in property. Such investments require extensive research and most buy to let options are long term investments, where the value of property can increase or decrease, depending on various market factors.

It can happen that the tax rules change after finalizing a deal, which can affect each person depending on their individual circumstance. It is necessary to get the right kind of property to avoid unpredictability and loss in such investments.

Even if you get an attractive deal, you may have to work on the figures carefully to analyze the hidden costs and other factors like the protection cost, stamp duty, letting agency fees, building and content insurance, the ground rent and the service charge for leasehold flats along with the cost of ongoing maintenance and repairs.

A survey by the Society found the figures in the months from March to mid-July in the BTL sector, is better than any other residential sectors. It found the landlords are looking to invest in different types of properties and they are also searching for new locations to buy as a result of Covid-19.

79 percent of the landlords who were considering investment in buy to let properties before the pandemic are expecting to change their plans and half such landlords still want to buy but are taking a fresh look into their plans.

29 percent of the landlords are re-evaluating the type of property in the post Covid phase, which they were looking to buy, and 29 percent are looking for new locations where additional 20 percent are reassessing their plans to invest and 22 percent are rethinking about their preference for time to invest.

As per the reports, 50 percent of the landlords who were surveyed by Leeds Building Society said they did not have any plan to invest in new properties before or after the lockdown.

Buy to let mortgage rates

Buy to let mortgage rates differs from standard residential mortgages as the lender has to work out how much can be borrowed based on the rental income of the property. As a general rule, the lender may look for the rental income to be at least 125% of the monthly mortgage payment and if the mortgage is £500 a month, then the rent will need to be at least £625 a month.

In such conditions, the lenders need a higher buy to let mortgage deposit as compared to residential mortgages. This also includes into account the amount the landlord earns in the year.

A buy to let mortgage broker can provide guideline to get the best deals as per individual circumstances. At the same time as the buyer should include other costs like -

  • The cost of the mortgage – Most lenders typically charge a fee of circa £1,000 for the product taken out, which can be added to the mortgage amount.

  • Survey fee - A range of surveys are available for the property being purchased --from a basic mortgage valuation to a detailed structural survey.

  • Building insurance – The lender requires the building insurance to be in place for a new property.

  • Stamp duty – It is required to be paid at the time of purchasing and the amount depends on the value of the property.

  • Management fee of a letting agent can be a percentage of the rent charged. Also, the buyer has to pay for the repairs and other related bills. The total cost should include the bills and expenses when the house remains vacant. If the property is bought as an investment, one may have to pay the income tax, the capital gains tax and inheritance tax.

  • Building insurance and other costs influence the price like the marketing expense, and the cost incurred on preparing the tenancy agreement, resolving legal issues and organising inventory.

Buy to let mortgage Natwest

Most lenders base the rental property mortgages on rental income and there are other legal obligations as a landlord like

  • Ensuring gas safety and energy performance

  • Insuring the property

  • Managing the property using various schemes or other methods

  • Budgeting the maintenance and redecoration

  • Keeping up with the tax payments

  • Understanding the potential risks associated with renting in private sector. Also, one can get loans on a house or flat to revamp the rental property

A number of lenders like Metro Bank, HSBC and Nationwide withdrew their tracker products from the sale as a response to the bank rate cut from 0.25 percent to 0.10 percent.

The payment holiday requests for landlords with BTLs or consent to let mortgage properties that were linked to Covid were reviewed by the lender where the process of acquiring is similar to the residential requests. It also said that the bank will not carry out new credit or affordability checks during the product transfer process, in case, the borrower keeps the same mortgage amount and mode of repayment.

In the last months NatWest lowered the buy to let mortgage rates, while, Barclays reduced it and also added new types of products for Help to buy.

Buy to let mortgage calculator

If you want to get such mortgage, you will have to answer to the queries of the lender. The first question asked is - If you are a first time buyer or a first time landlord. The lender needs to ensure if you own a residential unit.

They want you to own your residential unit for at least six months before getting a buy to let mortgage. Some lenders may want you to own the property where you can opt to live in other rental accommodation to apply for BTL.

In the case of ordinary mortgages, one has to choose between the fixed rates, or can try to get the amount through the tracker rates. Trackers are considered inexpensive but in that case you take a bit more risk as the monthly payment lead to increase in interest rates. In case you feel the increase in base rate, may make it difficult for you to afford the increase in the monthly payments, and then opt for a fixed rate.

If you feel the base rate will remain low for many years, you could afford increase in mortgage payment, opt for a tracker or use the mortgage calculator to calculate the repayment and change in the rates.

How much can I borrow?

Unlike a residential mortgage, the amount that is borrowed for BTL is based on the salary and the outgoings. Lenders calculate the rental income which should be at least 125 percent of the monthly mortgage payment – that is based on the interest only basis, it means, the mortgage cost should be less than the rental income.

In case you are buying a house for £200000, you will require 80,000 in savings to pay the least interest. At the time when the loan matures, mostly after 25 years, the capital can be repaid by selling the property. In case when the mortgage terms come to an end, one can get a remortgage onto another cheap rate offer or it will be automatically placed onto the lender's standard variable rate (SVR).

These are higher rates than the rest of the market and it means an increase in the monthly payments. Since such mortgages are required for longer term, it is advised to get a five year instead of two year term deal.

However, one should not rely on the sale of property to repay the amount. Do not fall trap on assuming that you will be able to sell it anytime.

The house price fall at certain occasions and one may not get the desired price to be able to pay all the related expenses. In case you are selling a BTL you will have to pay the capital gains tax if the gain is more than the annual threshold of £12,000 (for the 2020/21 tax year). Also you have to pay 20 percent, 40 percent or more depending on the income band on the income received as rent.

There are certain rules for mortgage interest tax relief, which means, the finance cost on the residential property will be restricted on the basic rate of the income tax. The finance cost like the mortgage interest, the interest on loans to buy furnishing and other fees related to the mortgage should be included.

Earlier one could deduct all the interest on mortgage from the rental income to calculate the tax. But now there is no relief in tax on the repayment amount.

How does a buy to let mortgage work?

It can become complicated if you are already a landlord and you are planning to rent out your premises, or if need to examine the mortgage contract terms or get a consent on let to avoid a breach of agreement with the lender. There are huge variations in the way the banks deal with accidental landlord who will charge extra interest on such properties or you will be asked to get a remortgage.

Some properties find it difficult to get the BTL mortgages. The eligibility to get such lending depends on the location, type of property and the condition of the house. The restrictions include–

  • Certain new built flats require huge buy to let mortgage deposits, especially, if you are buying a new build flat

  • Ex local authorities in certain specific areas and the high rise flats where lender face restrictions on the number of floors and blocks

  • Flats which are built on commercial premises

  • Holiday homes may not get rental income in certain seasons that lead to restrictions

How to get a buy to let mortgage?

The buy to let mortgage can be taken to invest in a house or a flat. If you have a good credit record and are not stretched too much on the borrowings like the credit cards, you can earn £25,000+ a year, you can get it but if you earn less, you can find it difficult to get the lenders' approval on such loans. Also it can be difficult to get such loans in case you have reached the upper age limit like in the range of 70 to 75.

What's the best buy to let mortgage?

The current stock market is highly volatile and the temporary increase in the stamp duty threshold to £500,000 has made the investment in real estate attractive to the investors who seek to diversify in the area.

There are many advantages of investing in buy to let portfolio and there are many investors who are thinking of investing in the area for the first time. Some of the most attractive two year fixed BTL deals are offered by NatWest, Post Office Money, Skipton Building Society and Virgin money.

In the five year fixed BTL deals, Virgin Money offers some of the most competitive deals at 60 percent LTV at the rate of 1.79 percent (3.9 APRC) that is fixed until November 2025 and it can revert to 4.54 percent variable. The deal charges £1,995 in product fees.

How much deposit do I need for a buy to let mortgage?

Depending on the type of mortgage, it is recommended to put more money in the buy to let mortgage deposit and lower rate, means, low monthly payment and greater margin between the rental and mortgage cost. The buy to let mortgage rates depends on the type of property and lender's conditions, and it can be in the range of 20 to 40 percent.

You may have to deposit more of the value of the property, although, some lenders may ask for as little as 15 percent of the property value, in case the rental income is high.

It is mostly interest only loan, which means, one has to pay the interest each month and not the capital amount. At the end of the term, one may have to repay the original loan. Such mortgages are also available on a repayment basis. The amount offered by the lender depends on the rental income that can be 25 to 30 percent more than the payment.

How to compare buy to let mortgages?

  • The BTLs are like ordinary mortgages but the fee and the interest rates on such mortgages are mostly higher. The minimum buy to let mortgage deposit required for it is usually 25 percent of the property value.

  • When applying for it, one should be cautious and carefully examine all the related terms and conditions.

  • The landlord should save the rental income to meet the related expenses like they may have to spend on major repairs and maintenance bills.

  • A complete research on the property and method of repayment should be carried out.

  • One should not assume that the property will always get tenants. There can be some voids when the property is unoccupied or when the rent if not paid. You need to have a financial cushion to meet the mortgage payment.

  • Certain types of BTLs are not regulated by the FCA and there are certain exceptions where one can get such mortgages for a family member like spouse, parents, grandparents, child or sibling.

Where to get a buy to let mortgage?

  • There are many specialist lenders, financial organizations and banks like NatWest, Skipton Building Society, Post Office Money, and Virgin money that offer it.

  • The lenders will conduct the affordability test where they will calculate the standard variable rate (SVR) to know how much rent you needs to charge.

  • They may calculate the extra expense like the letting agent fee, insurance, maintenance, safety check and other costs.

  • One may be asked to pay buy to let mortgage deposit that is 25 percent of the total cost of the house.

What are the interest rates for a buy to let mortgage?

Post office money offers rate 1.5% (4.3% APRC) fixed till November 2022 and NatWest has been offering attractive buy to let mortgage rates with 1.35 percent (3.9 percent APRC) fixed until 30 September 2022 which can revert to 4.09 percent variable and the deal is available at 60 percent loan to value (LTV) and charges £995 in product fees. Depending on the requirement for five year or two year, one can get competitive deals in the market.

What is the difference between a buy to let mortgage and residential mortgage?

The buy to let mortgages are interest only, whereas, residential mortgages are capital and interest loans. The key differences between the two are -

  • BTLs are interest only and it makes monthly repayment cheaper as the landlords' only pay the interest and they do not pay back any of the capital.

  • BTL is more expensive than residential mortgages because the banks view the tenant at a higher risk as compared to the owner occupied house. The fees for such buy to let mortgage rates are higher up to 3.5 percent of the property value.

  • For a residential mortgage, one has to pay up to 25 percent deposit to become a landlord and the profit made from such investment depends on the size of the deposit. The smaller deposits have higher interest rate, which means, smaller profits. It is best advised to deposit 40 percent to be able to access the best interest rates on the market.

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