For those looking to rent property out, they need to be aware that ‘buy to let’ mortgages are very different to normal residential loans.
The term ‘buy to let’ refers to buying a property to rent out to tenants. The main aim of buy to let is to make a profit, whether this is from the rental income or the growth in value of the property.
Consequently, mortgages taken for this purpose are treated as commercial borrowing by lenders and the Regulator, the Financial Conduct Authority. The FCA regulates very few of them as you are deemed to be in business, whereas the FCA looks to protect ordinary consumers. Therefore, most buy to let borrowers are not given the same protection from poor advice that normal residential loans receive.
The Financial Conduct Authority does not regulate some forms of buy to let.
Buy to let mortgages which are regulated include those where more than 40% of the property is used or will be used by the borrower or a member of the borrower’s immediate family as a residence. These are referred to as ‘Consumer Buy To Let mortgages’ and are assessed as if they were normal residential mortgages. The Financial Conduct Authority does regulate Consumer Buy To Let Mortgages.
Another group afforded greater protection are known as ‘accidental landlords’. This is often where someone finds themselves in the market not by choice but through necessity. These include owners who may have inherited a property they now wish to rent out. It also includes those who have lived in their house previously, but now need to move, but cannot sell up. An alternative to selling is to rent the property out until the market improves
So what are the differences in buy to let lending criteria?
The lending criteria applied by mortgage providers is also very different. These are some common features of buy to let loans:
- Some lenders require you to already be a homeowner and own the property you live in.
- The maximum loan is not linked to the borrower’s personal income, which is sometimes disregarded altogether. However many lenders require the borrower to have a minimum annual income of around £20,000-£25,000. This is so that they can afford temporary periods without a paying tenant (‘void periods’).
- The potential monthly rental is important and can restrict the maximum mortgage available. Often this must be around 145% of the monthly mortgage interest payment on any given loan size. A common ‘nominal’ interest rate of 5.5% is used for this calculation irrespective of the actual product interest rate.
- Maximum loans are around 75% – 80% of the property value. To understand why, see our page on buy to let mortgage LTV’s.
- Set up and arrangement fees tend to be higher than for residential loans.
- There are fewer lenders offering buy to let mortgages than for other types.
- Many buy to let loans are conducted on an ‘interest only’ basis. As the property itself will eventually be sold and can pay off the mortgage, lenders are not worried about the need for capital repayments to be made. this is very different to the residential mortgages criteria.
- It is often possible to have a portfolio of properties with just one mortgage lender.
- Some schemes offer high flexibility, allowing you to pay off lump sums, underpay and take temporary payment holidays. This can be useful if you suffer temporary periods when you cannot get a tenant.
- Lenders are comfortable with older borrowers, whereas residential mortgage lenders generally like the loans to be repaid by retirement or soon after.
Those who own four or more buy to let properties will be known as ‘Portfolio Landlords’. The lending rules are different again for this group, and have different affordability requirements for mortgage borrowing.
If you are, or plan to become, a landlord you should have buy to let mortgages explained by a competent, experienced adviser such as Robert Drury. There have been many recent changes in lending criteria, and Robert has up to date knowledge of the schemes available.
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YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE