5 things you need to know about buy to let mortgages
The buy to let market has come under pressure in recent years, with increased stamp duty and cuts to tax breaks leading to reports of landlords leaving the sector.
It looks, however, like things may be on the up for buy to let with the arrival of new, favourable mortgage deals for landlords.
According to the National Landlords Association; “There are more lenders and products available now than there have been in the last 10 years and a healthy competition is playing out among them, which means that there are some excellent deals for buy to let clients.”
If you’re considering investing in buy to let, or if you’ve become a landlord by accident – due to job relocation or moving in with a partner, for example, it is important to get to grips with the rules around buy to let mortgages.
If you already have a mortgage on your home, it is likely you will need to switch to a buy to let product before searching for tenants. There are many similarities between the two types of mortgage, but there are some key differences too.
Here are five things you need to know before you decide to buy a property and apply for a buy to let mortgage.
1 Buy to let mortgages are interest only
One big difference between buy to let and residential property mortgages is that most buy to lets are interest only. This means that you will pay the interest on the loan each month but none of the capital.
The good news is that your monthly payments will be lower than with a domestic mortgage. However, at the end of the mortgage term you won’t have paid off any of the loan and will need to find the funds to do so – by selling the house, arranging another loan or from savings. You should be careful about relying solely on the sale of the property to meet the repayment – in case house prices in the area fall.
2 You will need a bigger deposit
Lenders regard buy to let mortgages as riskier than residential property ones, so will usually ask for a larger deposit than might be required if you were buying the home to live in yourself. There are more potential pitfalls with rental property – that your tenants won’t pay their rent or that you’ll face void periods. This in turn means that there’s a risk you won’t meet your mortgage payments and the property may be repossessed.
Most lenders will expect you to find a 25% deposit for a buy to let mortgage. If you are able to put down 40%, you are likely to get a better rate.
3 The affordability rules are different
Unlike with residential mortgages, lenders are less interested in your salary than the expected income from the property. That said, some lenders will require you to earn at least £25,000 aside from your rental income.
To decide whether to offer you a mortgage, lenders will carry out affordability tests. They will use so-called interest cover ratios (ICRs) to work out how much income you are likely to make. ICRs look at your projected rental income alongside your mortgage payments and other fees and charges – management fees and landlords insurance, for example.
Most lenders will look for an ICR of 125%, meaning your rental income must be 125% of your mortgage payments. Some may impose higher levels, of around 145%, particularly if you are a higher rate taxpayer.
4 Fees and interest payments may be higher
Because of the risk factor mentioned above, buy to let mortgages have traditionally attracted much higher interest rates. However, this gap may be narrowing. Moneyfacts says that two-year fixed-rate buy to let mortgages are currently not much more expensive than the equivalent residential mortgages, with longer-term fixed rates about 1% higher.
According to Which? September 2019 saw average fixed-rate buy to let mortgages having an interest rate of 3.15%, down from 4.26% five years earlier. Variable mortgage rate deals dropped from 4.04% to 3.1% over the same period.
Arrangement fees can, however, be much higher, so it’s important to look at these as well as interest rates when shopping around for the best deal.
To find out how much interest you are likely to pay, there are plenty of mortgage calculators, such as this on the Moneyfacts website.
5 Some lenders have minimum and maximum age criteria
Many mortgage companies will only lend to people aged over 25, for buy to let. You may also find it hard to get a buy to let mortgage if you are a first-time buyer, although many specialist products are available.
Some mortgages have maximum age criteria – as loans are often for 25 years or more, they may take into account your age at the end of the term. For this reason, you may find it difficult to get a buy to let mortgage if you’re over 45.
However, as people are working later and looking to rental property to fund their retirement, many lenders are becoming more flexible in this regard. For example, earlier this year Santander announced that it was extending the upper age limit of its buy to let product to 85, meaning that 20-year loans could be available to the over 60s.
As specialists in the sale and letting of homes in Newington Green, Stoke Newington, Highbury, and Islington, we can advise buy to let investors on which properties in and around north London will meet your investment requirements. For more information contact M&M Property today.