Buy to Let

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Some buy to let mortgages are not regulated by the Financial Conduct Authority.

What is the difference between buy to let mortgages and residential mortgages?

The 4 most common variations are:

Interest rates

Buy to let mortgages generally come with higher interest rates than the equivalent residential mortgage with the same loan to value threshold.

Lenders income assessment

Some buy to let lenders have no minimum income requirements, in other words an applicant earning £5,000 a year can be considered. However the majority of buy to let lenders will require applicants to have a minimum income of £20,000. In addition to the clients’ income, the lender will also assess the rental income generated by the property with a certain rental amount needed in order to service the loan size. Residential lending will be based upon the applicant’s income with the lending amount being based upon affordability however generally no more than 5 x joint income as a maximum loan amount.

Bigger Deposit

Buy to let mortgages start with a minimum deposit of 20% whereas residential mortgages start with deposits from 5%.

Arrangement fees

Lenders’ arrangement fees on buy to let mortgages can be as high as 3.5% of the loan amount required for the lowest interest rates on the market; it is also very common to find lenders charging a percentage of the loan amount as an arrangement fee as opposed to a fixed arrangement fee. Generally the lower the interest rate the higher the arrangement fee. Residential mortgages commonly come with fixed arrangement fees.

Becoming a landlord can be financially rewarding however it should be considered as a long term investment. It can be risky with complexity of tenants and issues arising from unpaid rents, void periods, property maintenance etc. It can also be far more time consuming than other forms of investments. However, investing in property has long been considered as one of the best forms of investment.

When investing in a property as a buy to let investment, some people look for capital growth on the value of property over a period of time, others look for the property to generate and supplement their income by way of monthly rental income and some will look for short term property appreciation and sell for a higher price. This will depend on applicants’ age, investment appetite, personal preference on property and personal objectives.

When managing a buy to let property, it is important to take into account the costs (see list below). You should be therefore be aiming to achieve a gross rental income of 135% of your mortgage payments.

Costs in running a buy to let property include:

  • Property maintenance – upkeep and maintenance costs for the particular property, this also includes decorating the property which could range from painting walls, to requiring a brand new bathroom suite ahead of it actually being usable for letting to tenants.
  • Estate agent’s fees – letting agents charge typically 10% of the monthly rental income for finding and referencing tenants and 15% of the monthly rent for a full management service.
  • Ground rent / service charges – applicable to leasehold properties
  • Landlord Rent Protection + Legal insurance cover – to cover potential costs from evicting tenants in the event of non-payment
  • Building insurance cover – a compulsory condition on the buy to let mortgage offer
  • Furnishings – Furniture for the property should the property be let on a furnished basis
  • Gas / electrical test – The costs involved of ensuring you comply with regulations including safety tests.

When buying a property to let, especially for the first time, it would be wise to take assistance from local letting agents to establish; what types of properties are in demand and which locations are sought after by tenants. You should also look at areas which have for instance; hospitals, transport facilities and universities, which will drive a strong demand in the rental market.

Your home may be repossessed if you do not keep up repayments on your mortgage(s).

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