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Buy to Let and Let to Buy mortgages

Instead of letting your hard-earned money sit in a savings account and erode due to inflation, why not place your capital into property?

There are many benefits to becoming a Buy to Let (BTL) investor, not least that you are putting your cash into a tangible asset that should prove to be profitable in the long run. But there are many pitfalls for the uninitiated, too.

Here, we’ll talk you through the advantages and disadvantages of arranging a Buy to Let mortgage in a property market that’s been somewhat unpredictable in recent years - and we’ll provide plenty of practical advice to help you get your finances in order so you can turn your dream of becoming a landlord into a reality.

• What is a Buy to Let (BTL) mortgage?
• What is the eligibility criteria for a BTL mortgage?
• How much of a deposit will I need to put towards my Buy to Let purchase?
• How do I apply for a BTL mortgage?
• What if I’m a first-time landlord?
• Should I invest in a rental property?
• What are the additional costs?
• What kinds of mortgage products are there for landlords?
• What insurance will I need?
• Can I apply for a BTL mortgage if I am unemployed?
• Can I apply for a BTL mortgage if I am self-employed?
• Can I use my pension income to purchase a BTL property?
• Can I use bridging finance to buy a BTL?
• Can I live in my Buy to Let property?
• What are the standard requirements for a Let to Buy mortgage?
• Are there any other options?
• How to secure an investment mortgage
• Speak with one of our experts

If you would like to discuss your case directly with an experienced Buy to Let mortgage advisor, contact CLS Money today. We offer free, no-obligation consultations to would-be landlords who are weighing up their finance options and looking for a BTL mortgage with the best possible rates.

What is a Buy to Let (BTL) mortgage?

A Buy to Let mortgage is a loan that enables you to rent a property you have purchased out to tenants at a profit. In order to qualify for this type of product, you cannot live in the property; if you want to use the house, flat or bungalow as your permanent home, you will need to arrange a residential mortgage instead.

Unlike residential mortgages, most Buy to Let mortgages are arranged on an interest-only basis. This means that you, the landlord, will only pay back the interest on the loan and will not make monthly repayments towards the amount you have borrowed. Instead, you will need to pay back the full loan amount at the end of the mortgage term.

What is the eligibility criteria for a BTL mortgage?

Your income

The amount you can borrow towards a residential purchase will likely depend on your income, and therefore how much you can afford to repay towards the loan on a monthly basis. However, you may be pleased to learn that the affordability criteria are often much more relaxed for Buy to Let mortgages.

BTL lenders will want to know that you earn enough to cover your personal monthly costs. If you bring home less than £25,000 per year, you may struggle to find a provider that will consider your case – especially if you are a first-time landlord. But as long as you have a stable income that exceeds this amount (and you have the evidence to prove it), most lenders will be more concerned with the viability of your investment than your yearly earnings.

Buy to Let mortgage companies will want to see that the rental income you expect to make from the property will be enough to cover your mortgage payments. If you are already a landlord, they will predict the yield based on your historical accounts; if you are a first time BTL purchaser, they will look at demand and assess what other similar properties are being let for in the local market.

They will predict the affordability of the mortgage by calculating your interest coverage ratio (ICR), and stress testing this against the amount you want to borrow.

Typically, as long as your rental income will be equal to 145% of your mortgage payment – with the interest rate assumed to be 5.5% – you will meet the lender’s affordability criteria, and you will be offered a BTL mortgage.

If the results from this stress test don’t work in your favour, but you’re still keen to invest in a Buy to Let property, some providers will also let you top slice your mortgage; that is, use some of your personal income to top up any shortfall in rental returns.

Top slicing is a particularly useful avenue for investors who are more concerned about the property’s increase in value over time than immediate profits from its rental yield. It is not the best route to investment for landlords who are stretching their finances to the absolute limit by taking out a BTL mortgage, or those who are looking to purchase a property in an area with higher than average property prices.

For more information on the pros and cons of top slicing, speak to one of the mortgage brokers here at CLS Money. Our team will assess your case and advise on the best course of action according to your longer term financial goals.

Your age

Some lenders have stricter age criteria than others. In the UK, you need to be at least 18 years old to apply for a Buy to Let mortgage, but many providers prefer borrowers to be over 21 (and, in some cases, over 25).

At the other end of the spectrum, most mainstream lenders will not consider applicants who are over the age of 75. A small number of lenders have no upper age limit.

The type of property you wish to purchase

Standard brick and mortar homes are much more mortgageable than properties with more unique features. Some lenders will automatically dismiss listed buildings and those with thatched roofs and timber frame constructions, as they are deemed to be higher risk.

What the property will be used for

If you are looking to rent your property out to a single tenant or family with a straightforward letting arrangement, you should be able to access a wide pool of Buy to Let mortgage products. However, if you are going to invest in student accommodation, a House of Multiple Occupation (HMO) or a holiday let, your choices may be more limited.

Whether you are already a homeowner

If you have owned another property for some time, and you have kept up with your repayments for at least 12 months or more, you will be more likely to be accepted for a BTL loan. There are some providers in the market who prefer to deal with investors with multiple properties, and who can offer more competitive rates to portfolio landlords.

How much of a deposit will I need to put towards my Buy to Let purchase?

You will normally need a larger deposit for a Buy to Let investment than a residential purchase.

Most lenders will consider your application if you can put down at least 25% of the purchase price upfront, which will mean your loan to value (LTV) ratio is 75%. (For comparison purposes, the same provider may lend on a residential purchase with an LTV of 90-95%.)

However, if you are planning to invest in a property of standard construction that is expected to generate a healthy rental income, you may only need a deposit of 15%.

As with any mortgage, the more you can save towards your deposit, the better rates you are likely to be offered, as a lower LTV means there is less chance of you defaulting on the mortgage.

If you already own your own home, it may be possible to use some of the equity you have accrued in this property to take out a second mortgage on a Buy to Let property.

How do I apply for a BTL mortgage?

The Buy to Let mortgage application process is no different to the residential application process in that you will need to be confident that you can meet the eligibility criteria of a lender before you approach them for an offer.

For help finding a suitable provider or sourcing a product with more competitive rates, be sure to get in touch with our specialist BTL mortgage advisors.

As we’ve already discussed, the lender will want to know how much income you receive from your salary (if you are employed) or your profits and takings (if you are self-employed). In most cases, you will need to be earning at least £25,000 per annum to qualify for a Buy to Let mortgage. You will need to be able to provide proof of earnings in the form of bank statements, accounts, and possibly even SA302 forms.

So that the lender can build a more accurate picture of your financial position, you will also need to provide information on your expenditure and other existing debts.

If you have a lower than average credit score, or a history of poor money management, you may find that your application is rejected by some of the more mainstream lenders, as you present too much of a risk. To increase your chances of finding a great BTL mortgage deal, take active steps to clean up your credit file and settle as many of your debts as you can before starting your BTL mortgage application.

For more information on applying for a mortgage with adverse credit, and advice to help you improve and protect your credit rating, click here.

What if I’m a first-time landlord?

Lenders are traditionally more wary about lending to first-time property investors, as inexperienced Buy to Let purchasers pose more of a risk.

However, it is possible to secure a Buy to Let mortgage if you are new to the BTL market, and indeed if you are a first time buyer who has not taken out a residential mortgage before. You’ll just need to search a little harder to find a mortgage provider who is willing to take a broader view on your circumstances.

You will also need to get up to speed with the additional costs
involved in finding and securing the right mortgage, as well as repairing, maintaining and tenanting your rental property on an ongoing basis. Do your research and make sure the numbers add up before setting your heart on a BTL investment!

Should I invest in a rental property?

Becoming a Buy to Let landlord isn’t for everyone – and thanks to changes in legislation in recent years, it’s certainly not always the road to wealth and abundance that it once was. But if you time your purchase right, and ensure you weigh up all the pros and cons before committing to your investment, you could set yourself up for a much brighter financial future by harnessing the earning potential of property.

To decide whether now is the right time to purchase a Buy to Let, you need to consider whether:

• You want to use your investment to generate a regular monthly income now, or you want to set yourself up to make a potentially larger return in the future
• There is sufficient demand for rental properties in your chosen area
• The predicted monthly rental income from your investment will be enough to cover your mortgage commitments
• You want to manage tenants and the maintenance of your rental yourself, or outsource this work to a dedicated property management company (in which case you will need to budget for additional fees)
• You can afford to cover the extra costs involved in securing a Buy to Let (we’ll cover these in more detail further down the page)

You also need to have the means to cover your monthly mortgage payments, regardless of what happens to you or your property. For example, you need to consider what will happen if you experience a rental void due to drop in demand, and what the dip in rental income will mean for your financial situation. You must also prepare for non-payment of rent and unexpected drops in the property’s value.

Think carefully about the pros and cons of investing in a Buy to Let property before you begin your search for a BTL mortgage.

What are the additional costs?

There are, of course, certain costs involved in purchasing a Buy to Let property and arranging a suitable mortgage – and these must be budgeted for.

Legal considerations

Stamp duty:

Whenever you purchase a new property – either as your home, or as an investment – you will need to pay stamp duty. Unfortunately for landlords, the surcharges for BTL investors increased in April 2016, meaning that you now need to pay higher charges across all house bands. This was one of the measures announced a few years ago by the UK government to bring house prices down to manageable levels.

As a BTL investor, you can expect to pay the following stamp duty figures on your purchase price:

• 3% up to £125,000
• 5% between £125,001 and £250,000
• 8% between £250,001 and £925,000
• 13% between £925,001 and £1,500,000
• 15% over £1,500,000

Overseas investors who are defined as non-UK residents will need to pay an additional 1% surcharge in any band, even if they are purchasing the property jointly with someone who lives in the UK.

It’s worth noting that caravans, mobile homes and house boats are currently exempt from stamp duty.

Solicitors’ fees:

You will need to instruct a solicitor to handle your purchase and manage your mortgage application. Some lawyers charge a fixed fee, while others bill by the hour.

Mortgage costs

As with a residential mortgage, there are certain fees involved in setting up your loan.

Brokers’ fees:

If you need to seek specialist advice – or you want to be supported by an experienced mortgage broker throughout the application process – you may need to pay for this service.

Talk to the team here at CLS Money to learn more about our charging structure.

Booking fees:

Some mortgage lenders will take a non-refundable booking deposit to ensure you are serious about proceeding with the deal.

Arrangement fees:

Lenders will often charge a fee on completion. Sometimes, you will be able to add this fee to your BTL mortgage – but be aware that doing so will increase the amount you owe.

Valuation fees:

Before making you an offer, your chosen mortgage company will need to value your property to make sure it is worth the amount you want to borrow. Some will carry out this work for free as part of their mortgage deal.

If you have concerns regarding the condition of your property, you may want to arrange a homebuyer survey or a RICS survey. Though they are more expensive, these reports will go into more detail about any structural and maintenance issues that are present within the property, and how they may affect the property’s worth, both now and in the future. Speak to a member of our team to arrange a homebuyers survey on your property.

If you find that your property is valued below your intended purchase price, you can either go back to the vendor or the estate agent and place a lower offer, or contest the valuation by providing evidence that other similar properties in the area have recently been sold for the same price or higher.

Exit fees:

Depending on your existing lender’s terms, you might have to settle exit charges when you clear your existing mortgage balance. If you are tied into a deal and want to leave the arrangement before the term is up, you may need to pay early repayment charges.

Ongoing financial commitments

Property maintenance fees:

As we discussed earlier, it is possible to outsource the management of your investment property to a specialist property management company. But this kind of service doesn’t come cheap – you should expect these companies to charge at least 10-15% of the rent on a monthly basis.

Letting agent fees:

If you want to let an external company source and vet new tenants on your behalf, be prepared to shell out around 3 to 4 weeks’ worth of rental income.

What kinds of mortgage products are there for landlords?

Fixed rate mortgages

Set rate mortgages are often a great choice for Buy to Let arrangements because they essentially lock in an interest rate for a fixed period. As the landlord, you will be pay the same amount towards your mortgage every month, which can make budgeting for ongoing management and tenant finding costs much more straightforward.

Fixed rate Buy to Let mortgages are normally offered on an interest only basis. This means that, if you want to eventually own your BTL property outright, you will be expected to pay back the amount you have borrowed in full at the end of your mortgage term.

The most popular fixed rate terms are 2 years, 5 years and 10 years, with some lenders offering even longer agreements. The shorter the term, the more competitive your interest rates will be – but, depending on the state of the market when you come to remortgage, you may find that you end up paying more on a monthly basis thanks to elevated interest rates.

If you don’t want to worry about renewing your mortgage for some time, choose a 5 or 10 year mortgage (but pick a deal with a low early repayment charge or exit fee, just in case your circumstances change and you need to remortgage or sell your BTL property earlier than intended).

Tracker mortgages

Tracker mortgages are variable rate mortgages that fluctuate according to the Bank of England’s base rate. Opt for this type of product, and your interest rate will be set at a margin above the base rate. It will go up and down depending on across-the-board interest rate changes.

Most lenders will cap their tracker mortgages so that your payments will never become unmanageable; others will collar them to ensure the rate cannot go below a minimum level.

The early repayment charges associated with tracker Buy to Let mortgages tend to be lower, so they are a great option if you want a little more flexibility from your deal.

Offset mortgages

By offsetting your savings against your mortgage, you can use your own money to reduce the balance on which interest is charged.

If you have chosen an interest only deal, you can use an offset mortgage arrangement to lower your monthly mortgage payments; if you are on a repayment mortgage, you can use your savings to reduce the length of your term.

Sitting tenant mortgages

Under the Rent Act of 1977, tenants who entered into a tenancy agreement with their landlord prior to 1989 may have the right to remain in the property they are renting, even if their landlord sells to a new investor.

As you can imagine, this can throw up some challenges for Buy to Let purchasers who have their own plans for the property, or who want to make significant changes to the tenant’s letting contract.

The good news is, if you buy a BTL property with a tenant ‘in situ’, you can expect to pay a lot less for the house, flat, apartment or bungalow in question. However, many lenders will be unwilling to let you borrow on a property with a sitting tenant, so you could have trouble finding suitable finance.

If you are concerned that a sitting tenant could be restricting your mortgaging options, contact CLS Money. Our Buy to Let mortgages brokers have many years’ experience in finding and arranging mortgages for landlords who are facing tricky or unusual circumstances.

What insurance will I need?

Investing in property can be highly lucrative - but it can be risky, too. That’s why, once you have found the right mortgage product, we would highly recommend taking out specialist landlord cover.

Standard home insurance will not account for missed rental payments, damage to the property and other issues exclusively faced by landlords, whereas a specialist Buy to Let insurance policy will offer protection in all these circumstances.

These kinds of landlord insurance plans can be tailored to include property owners’ liability, buildings insurance, alternative accommodation, and loss of rent. You can also request to add contents insurance, accidental damage cover and theft and malicious damage cover to your policy for extra peace of mind.

If you own multiple BTL properties, you will be able to apply for portfolio landlord insurance, which will offer adequate protection to all your investments.

Can I apply for a BTL mortgage if I am unemployed?

You may be able to get a Buy to Let mortgage if you currently have no personal income, but you will almost definitely need to approach niche lenders with more flexible affordability criteria than the main High Street banks and building societies. These more specialist providers will offer you a deal with no minimum income requirement.

Can I apply for a BTL mortgage if I am self-employed?

Yes! As a freelancer, contractor or self-employed individual, you will have access to the same Buy to Let mortgage products as those who are in full-time employment, as long as you:

• Have an adequate deposit
• Are of a suitable age
• Are purchasing a viable investment
• Have a sound credit score

You will need to provide your preferred lender with more comprehensive proof of income - and you might need to get your accountant to produce SA302s, which detail the total income you received and the amount of tax you paid in your previous self-assessments.

You may also be able to buy your investment property through your limited company. This is a great way of keeping your purchase as tax efficient as possible – especially if you are a higher rate taxpayer. There are additional fees to consider, though, and you may need to set up a new Special Purpose Vehicle (SPV) with a relevant Standard Industry Classification (SIC) code at Companies House.

Contact our mortgage brokers for more information on self-employed mortgages or for help finding a lender that offers limited company Buy to Let mortgage deals.

Can I use my pension income to purchase a BTL property?

Some lenders will accept applications from landlords who want to use complex income such as pension payments to fund their purchase. However, the success of your application will depend on a range of other factors. Let us know if this is an option you are keen to explore, and we will introduce you to providers who can offer this kind of BTL mortgage deal.

Can I use bridging finance to buy a BTL?

A bridging loan is a short term loan that can be used to quite literally ‘bridge the gap’ between your new BTL purchase and the sale of an existing property (and/or the release of funds from another source).

Bridging loans are frequently used by developers and private investors who want to buy a new BTL property, renovate it, and resell it on straightaway. They are much easier to set up than traditional mortgages, and they are a useful tool in auction house situations where buyers must act quickly in order to protect their deposit and complete on their purchase.

Bridging loans are by no means a long term solution, nor a replacement for a full BTL mortgage, but they can certainly be used to speed up the purchasing process.

Can I live in my Buy to Let property?

If you want to move into a new property whilst keeping your existing home and renting it out, you will need to arrange a Let to Buy mortgage.

This will usually consist of two financing deals: a Buy to Let mortgage on your current home, and a residential mortgage on your new home.

You can also use some of the equity in your current property to put down a deposit on a new property, if doing so will enable you to retain an adequate LTV.

What are the standard requirements for a Let to Buy mortgage?

The eligibility criteria for Let to buy mortgages are similar to those for Buy to Let mortgages, as both of these products are allowing you to rent out at least one of the properties you own.

To qualify for a Let to Buy mortgage, you will normally need to:

• Be aged between 25 and 75
• Have a deposit of 25% of the purchase price, and/or enough equity in your current property to reach a loan to value ratio of at least 75%
• Prove that you will be able to generate enough monthly rental income from your current property to cover its Let to Buy mortgage payments
• Meet the lender’s affordability criteria for both mortgages – ie, ensure you will have the means to service both financing agreements
• Have a clean credit history, with no evidence of missed payments, CCJs, IVAs or bankruptcies in the last 6 years

If you are concerned that you cannot meet some of these criteria, contact CLS Money. We have access to the whole of the Let to Buy mortgage market, which means we can source deals from more specialist lenders who are willing to review applications on a case-by-case basis.

Are there any other options?

You don’t always need to convert your residential mortgage into a Let to Buy mortgage in order to satisfy your legal obligations.

Contact your existing lender in the first instance to see if they would be willing to provide consent to let. By doing so, they will be allowing you to let out your property to a tenant under the terms of your existing mortgage.

Alternatively, you can look into arranging a second charge mortgage. This is essentially a mortgage on top of your mortgage; another loan, secured against your property, that can be used to unlock equity that can be placed into another purchase.

How to secure an investment mortgage: at a glance

• Consider the pros and cons of becoming a landlord – and whether it’s the right move for you
• Consider the viability of your investment in terms of the type of property you want to buy, where it is located, the demand for rental accommodation in your chosen area and its potential rental yield
• Settle as many of your other existing debts as you can before setting the wheels in motion
• Save as much towards your deposit as possible – or consider releasing equity from other investments if you have already accrued capital elsewhere
• Research the advantages of fixed rate mortgage, tracker mortgages, offset mortgages and other Buy to Let mortgage types before committing to a deal
• Consider the additional costs involved in purchasing and mortgaging a Buy to Let investment
• Source comprehensive landlord insurance
• Consider bringing a letting agency and/or a property management company on board to help with the day-to-day running of your tenancy
• Before arranging a Let to Buy mortgage, see if you can get consent to let from your residential mortgage lender first

Explore your Buy to Let and Let to Buy mortgaging options with CLS Money.

There are so many things to consider when you’re considering buying or letting an investment property – and any mistakes now could cost you a great deal of time, money and resources later.

Luckily, our team are here to make sure your Buy to Let or Let to Buy venture gets off to a flying start.

From finding the right agreement to handling all the paperwork ready for completion, our friendly Buy to Let mortgage brokers can manage the entire mortgaging process from start to finish. We’ll work closely with you to source a deal that will help you achieve your short, medium and long term financial goals – and we will work around the clock to ensure your mortgage application goes as smoothly as possible.

Discover why our company has been rated as ‘Excellent’ by over a thousand customers and counting. Contact CLS Money now to arrange your initial consultation at a time that suits you!

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Do I need to pay stamp duty land tax (SDLT) on a buy to let property?

If you buy a second property that is not your main residence, you will have to pay stamp duty land tax (SDLT) on it. The amount you will pay is dependent on the purchase price of the property as detailed below:

Less than £125,000: 3%

£125,001 – £250,000: 5%

£250,001 – £925,000: 8%

£925,001 – £1.5 million: 13%

£1.5 million+: 15%

Information correct as of April 2017 – Source:www.gov.uk/stamp-duty-land-tax...

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