Residential buy to let mortgages are available for individuals and companies renting property out for people to live in. We know that already, but what are the particulars that you need to be aware of?
In our latest blog, we take a look at 3 key facts that you need to know before you begin the investment and purchase process for your latest buy to let property. And as always, drop us a line for advice and guidance and to explore your opportunities based on your personal and business circumstances.
There are 3 key facts that you need to know about residential buy to let mortgages
1. Lending criteria are not the same as normal residential mortgages
When you apply for a residential mortgage for your first home, or to move home, your lender will look at your personal circumstances. Your income, credit history, current borrowing, and a number of other areas so that they can assess the risk that you present to them. If that all checks out, you get your mortgage, and your offer will depend on how good your record and affordability are.
In the case of residential buy to let mortgages, the criteria are different. Your lender will look at the business case for the property you want to buy. You will need to be able to demonstrate your projected costs and net income from the property you want to invest in. Many lenders apply a calculation where your income must be, typically, somewhere between +122% – +145% of the value of the mortgage. But don’t worry, most residential buy to let mortgages are interest only, so payments would be relatively low.
If the criteria is +122% and your monthly residential buy to let mortgage payment is £80, your net income from your property after costs and expenses like insurance, maintenance and so on, would need to be £97.60
Your lender may also stress test your mortgage against a higher rate of interest. Typically a rate of 5.5% is used. But as a business, these are costs that you can build into your forecasts and work out whether the property you want to invest in will be financially viable for you.
Your lender could also include your income in their affordability checks. This is called top-slicing. If there is a shortfall, or period when the property is not let, or even problem tenants, then you would be able to use your income to bridge the gap. There are only a few lenders that take this approach, so it’s best to speak to a mortgage broker if you want to take this approach.
Finally, for portfolio landlords; landlords with a portfolio of properties, rules changed in 2017. Most lenders will now want to see detailed figures for all properties in the portfolio, not just the projections for the property that you want to invest in.
2. Buy to let opportunities are not uniform across the UK
Residential house prices differ across the UK. London remains the most expensive region to buy property but has been overtaken by the North and Midlands in terms of house price inflation. In the North and Midlands house prices are lower, and growth forecasts are higher than in London. This is just three UK regions, so it is clear that there is a complex proposition to understand before deciding on an area to invest in. The purchase price, forecast growth, and rental yield are just three considerations to understand before beginning to even look for a property, so taking professional advice and researching the market is important.
To view data from the House Price Index visit HM Land Registry*
Savills also publishes regular analyses. View the latest data here*
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So there’s a balance between your initial level of investment, mortgage liability, mortgage payments, rental yield, and long-term return on investment. Higher property costs may yield a higher cash value but lower percentage return but require higher mortgage value and deposit. A lower initial investment could mean a higher rental yield by percentage, lower risk, and better long-term opportunities.
3. You will need to raise capital for a larger deposit for residential buy to let mortgages than normal residential mortgages
A normal residential mortgage comes in many different sizes. Loan to value can be anywhere from 95% downwards, and with recent Government schemes, can even help first-time buyers secure a mortgage when they don’t have a deposit. Residential buy to let mortgages, however, do differ significantly.
Lenders will typically look for a loan to value rate between 80% and 65%. In the case of portfolio landlords, an LTV of 65% across the portfolio is likely following the introduction of rules by the Bank of England in 2017. So you will need to raise a deposit between 20% and 35%. This could be from available funds, raised from your home or other assets, or from your existing property portfolio. There could be other sources available to you, so professional advice here is key to making the right decisions on your capital raising.
This is where taking the right professional advice is important so that you can realise the right opportunities, and find the lender that is most suitable for your particular business and personal circumstances.
For advice and guidance on your residential buy to let mortgages drop a member of our team a line, and we can take a look at your personal circumstances and help you find the best mortgage and protection products to suit your needs.
Liddle Perrett Ltd is an appointed representative of PRIMIS Mortgage Network. PRIMIS Mortgage Network is a trading style of First Complete Ltd which is authorised and regulated by the Financial Conduct Authority.
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