This episode features our host, Sarah Tucker, who is joined by Co-Host and Senior Broker at The Mortgage Mum, Shelley Walker, who is an expert in Buy to Let Mortgages.
What is a Buy to Let mortgage?
A Buy to Let mortgage is a loan to buy a property to let it out. You will be looking to make a profit on the rental income and get some capital growth over time.
Shelley – I personally have a few Buy to Let properties – it’s a growing portfolio. I’m trying to build it further for our family’s future.
What was your motivation for buying Buy to Let properties?
I wanted to generate a monthly income with not too much effort! I’ve had my own Buy to Let property for ten years now. It’s the flat that I used to live in before I moved in with my husband. I didn’t have any equity in it at the time.
I bought it, did a lot of work on it but it was still worth what I paid and I just couldn’t walk away from it. I’ve been lucky to have the same family living in that property for the whole ten years.
I completed on another property last week, which will undergo some refurbishment, and I’m in the process of buying another one.
How much can I borrow on a Buy to Let mortgage?
With Buy to Let properties, it’s not about your income. Lenders look at the value of the property against the rental income that it’s going to generate.
It can vary depending on whether you are a basic rate taxpayer, a higher rate taxpayer or if you’re buying through a limited company. There are different ‘stress tests’ around how much you can borrow.
What you really need to know is how much that property is going to rent for. It does depend on the lender a little, but as a general rule, the lender will want your monthly rent to cover your monthly payment by 125% – giving you a bit of profit on top.
They will often base this on a 5.5% interest rate, even though that’s quite high for today’s market.
Do I need to have a certain income to get a Buy to Let mortgage?
There are lots of different solutions and products available. It’s not one size fits all. Some lenders want you to earn a certain amount, often £25,000 and some lenders don’t care how much you earn. It’s all about that property.
Some of the other criteria involved are that you must be an owner-occupier – that is, you already own a home and live in it. But some lenders will give you a mortgage as a First Time Buyer with your first property being a rental – although they’re likely to assess affordability as a residential property rather than a Buy to Let.
How much deposit will I need?
Generally you will need a 25% deposit for a Buy to Let, which is not easy to raise. But there are some creative ways that you can get a deposit for your first investment property, particularly if you already own a home.
We often help people raise funds from their own residential property to use as a deposit. We remortgage with a standard residential mortgage for capital raising, which means we’re pulling additional money out for onward investment.
You need a certain amount of equity, as generally you can remortgage up to 85% or 90% of your property value. And it doesn’t have to be expensive – I recently helped a client release £180,000 and their monthly payment didn’t change, because we extended the mortgage term instead. She’s now ready to buy a Buy to Let at auction with cash.
Is it illegal to rent out a house without a Buy to Let mortgage?
It isn’t actually illegal, but it’s very much frowned upon and your mortgage advisor would not recommend you do this in any way. You would also be in breach of contract with your mortgage lender.
It’s not too difficult to arrange to rent out your home. You can seek Consent to Let from your current lender – I did it myself on my flat. There’s normally a small fee to do that. I haven’t had many occasions that lenders have declined Consent to Let to a client.
It can be simpler than getting a Buy to Let mortgage, especially if you don’t have the 25% deposit required.
Should I choose an interest only or repayment Buy to Let mortgage?
A lot of landlords choose interest-only for Buy to Let, as it means your monthly payments are lower and you make more profit on the rent.
But it will depend on what your investment strategy is. Some people are ‘occasional landlords’; they perhaps buy one property for their children when they grow up, or for when they retire. They might well put that on a repayment mortgage because it’s less about the monthly income and more about having a fully paid-for home in the future. They can either live in it or sell it and use the money in retirement.
With interest-only you will get more income month by month. But at the end of the mortgage term you need to repay the mortgage in full and you must have a ‘repayment strategy’ or ‘repayment vehicle’ set up for that.
What we mean by that is you must show the lender how you will repay the loan: by selling the property in years to come or setting some of the rental money aside in an ISA, for example, or in your pension pot.
How many Buy to Let properties can I own?
There’s no limit to how many you own, but once you have four properties most lenders will consider you a Portfolio Landlord.
This doesn’t include property that is unencumbered – which means you own it outright, with no mortgage. Some people have several unencumbered properties and two or three mortgages and they’re still not a portfolio landlord.
If you are a portfolio landlord, you are treated differently. Most lenders will look to stress test against your portfolio. They use those calculations that we mentioned earlier against all of your properties combined.
As a broker, we input details of the whole portfolio which can be a lot of extra work. If you’re planning to be an investor, find yourself a broker that you can see yourself working with long term, because the last thing you want is to have to go through your whole portfolio every time with a different person! It’s much better to pick up the phone to your broker that knows you and your portfolio and has all your details.
We can help you raise capital from your portfolio – you’ve got your existing properties, perhaps you’ve done a refurbishment, so they are worth more money. Now we can look at a Buy to Let remortgage against that new value to release that capital. And it’s much easier if you’ve got that ongoing broker relationship.
We’re here as a fresh pair of eyes to help you identify new opportunities and really get the best out of your Buy to Let – whether it’s a single property or a full portfolio. If you have any questions, just get in touch, we would love to help.
Your property may be repossessed if you do not keep up with your mortgage repayments. The Financial Conduct Authority does not regulate some Buy to Let Mortgages.