A buy to let (BTL) mortgage works like a normal mortgage but it has been designed specifically for a property that will be rented out.
The definition of a buy-to-let mortgage is a type of property investment in which the buyer becomes a landlord with the aim of renting the property out at a profit.
A BTL property is normally a house or flat which has been purchased to rent out. BTL Property also includes property that may have been inherited or is no longer lived in by the owner as they have moved in with their partner.
You can not take a BTL mortgage if you intend on living in the property, this would be a breach of the mortgage conditions and could be classed as mortgage fraud.
Do I need a buy to let mortgage if I intend to rent the property out?
If you are purchasing a BTL property with a mortgage (and not outright in cash) or remortgaging a property that is rented out, you must arrange a Buy to Let Mortgage.
If you are renting out a property that you have previously resided in you should seek consent from the lender (if there is one) to let the property. Sometimes a lender will allow you to do this but they may impose a deadline for you to remortgage by, add a fee or vary the monthly mortgage payments.
It is often best to remortgage the property on a BTL basis.
If you rent a property out that has a residential mortgage on it without the consent of the lender you will be committing mortgage fraud and the consequences can be severe. This also works in reverse, you are not allowed to reside in a property that you have secured a BTL mortgage against without the lenders consent.
Is there a difference between a Buy to Let mortgage and a Residential mortgage?
A BTL mortgage is assessed on profitability (rental income) whereas a residential mortgage is assessed on affordability and your financial status.
It is often easier to secure a buy to let mortgage than a residential mortgage.
It isn’t uncommon for a Buy to Let Mortgage lender to have the following requirements:
- Lower LTV’s for first-time landlords
- Landlords can’t be first-time buyers
- A minimum employed income
- A minimum rental yield
- A minimum number of years acting as a landlord
- Restrictions on the property type
There are other key differences between the two, not just on how they are assessed but:
- Interest Rates – BTL mortgages are more expensive than residential mortgages as the interest rates are higher
- Minimum Deposit – You will ideally need a deposit of at least 25% giving an LTV of 75%. There are a small number of lenders offering 80% LTV BTL Mortgages but these are not aimed at first time landlords.
- Fees – Lenders arrangement fees are much higher than residential mortgages. Some lenders charge a percentage (1.5% to 2%) of the mortgaged amount and some charge a fixed fee. Typically fixed fees start at £995
- Tax – Your tax status can impact the amount you can borrow as it impacts the rental returns
- You need to declare BTL income to HMRC
Can you have a residential mortgage and a buy to let mortgage?
Yes, you can have as many mortgages of either type that you can afford.
What is Rental Cover?
The lender sets what their policy is for rental cover, this is normally shown as a percentage. As BTL Mortgages are assessed on profitability and not personal income lenders use Rental Cover to set the minimum amount of rent they will accept the mortgage on.
Simply put, Rental Cover ensures the rental income covers the mortgage interest as a minimum.
The minimum rental cover is 125%, however not all lenders use the lower amount and some often use 140%. This means you need your rental income to be 25% or 40% more than the mortgage repayment.
Let's look at an example, here we will assume the mortgage is £150,000 the lender's requirement is a rental cover of 125% and the mortgage interest rate is 5.5%
First, we work out the interest payable
Mortgage Amount: £150,000
Interest Rate: 5.5% (estimate)
= £150,000 x 5.5% = £8,250 / 12 = £687.50
Now we take the £687.50 and x it by 125% to get £859.37 which represents the rental income required based on an interest rate of 5.5%
What is Rental Yield?
Rental yield is how much return is likely on a property. It is calculated by taking the annual gross rent and dividing it by the purchase price.
Yield is very important as I am guessing you didn’t purchase a Buy to Let to not make any money? Your rental yield should generate sufficient margin to cover the running costs of your BTL investment.
A rental yield between 5% and 8% would be considered a good return to aim for.
Let's calculate the yield on a property purchased for £200,000 with rental income of £850 per month:
£850 x 12 = £10,200 gross annual rent
£10,200 / £200,000 x 100 = 5.1% yield
When calculating yield you should also include any costs that you have incurred refurbishing he property.
Why should I invest in property?
That is a difficult question to answer, as different investors have different needs, tax status and attitude to risk.
Property investment has been popular among investors for many years, but it is not without its risks.
Property value can fall, interest rates can go up, and monthly rents can become unaffordable. There is a lot to consider before you aim to become the next property tycoon!
You need to make sure you work with a specialist broker who thoroughly understands not only the process but the implications as well.
At Hello Mortgage we have a specialist Buy to Let Broker team backed by ex accountants who have access to qualified tax advisers. Don’t leave your investment to chance.