Top 5 must know tips for Buy to Let Mortgage in UK
We often get lots of questions and enquiries regarding Buy-to-Let mortgages. So, have compiled some general advice and top five tips for the same. You may also refer to our FAQs on buy-to-let property financing.
Buy-to-let properties are a great option if you are looking for a pension plan, medium or short-term investment, or to increase regular monthly income to better adjust to life.
Tip 1: Your Buy-to-let Mortgage Affordability Statement
A buy-to-let mortgage is mostly focused on the value of the rental income. This is unlike a residential mortgage, where your personal income is assessed to figure out how much you can borrow.
Note: There could be some minimum income requirements where your personal salary might be assessed. (more on this later)
However, just because the property you are interested in might produce £850 and your mortgage payment on an interest-only basis is around £170. It does not mean the mortgage is automatically going to be agreed upon.
Ask your finance broker to conduct a stress test?
The lender will run a stress test based on a higher interest rate (since the rates may be increasing in the near future). So even though your mortgage payment might be around €170, when the lender runs the stress test the rental income may need to be around higher, maybe £1020 in this example for you to be able to achieve the mortgage that you want.
So, the first step is to find out what the rental income will be for the property you’re interested in. Talk to your BTL mortgage broker, have them run the stress test, and confirm whether you will be able to obtain the mortgage on the said property.
The stress test is to gauge potentially increased rates. It also includes rental voids, maintenance costs, and other costs that could incur when you own a property.
Tip 2: Your Upfront Costs in Buy-to-let mortgages
The first thing to learn about buy-to-let mortgages is that the deposit requirement is bigger in comparison to residential mortgages.
Buy-to-let mortgages generally require a 20/25% minimum deposit upfront.
There may be other fees involved that are similar to residential mortgages. E.g – an arrangement fee may be added with the mortgage itself.
There are also valuation fees and legal fees to consider.
There is also an addition of stamp duty on top of the deposit.
Tip 3: The Property is Key
Make sure to evaluate the property
The type of property and the condition in which it is will determine your ability to purchase a buy-to-let mortgage.
The property needs to be in rentable condition at the time when the lender carries out the mortgage valuation.
If you are considering purchasing the property and doing an overhaul later, make sure to have its mortgage evaluated at the time when it is ready to let in tenants.
Tip 4: Get the Right Tenant
You must properly evaluate the tenant before letting them in your property.
While there are a lot of tenancy agreements that you can arrange, you should stick to the Assured Short-hold Tenancy (AST) Agreement. This is around 12 months.
Usually, one person, a family, or a family as tenants on a 12 month AST is the standard.
If you are thinking of going the other way, for instance, letting in a student, a company, or anyone that does not qualify as the standard tenant, it will reduce your options.
Tip 5: Final Considerations
Some of the most common things you should be aware of while purchasing to-let mortgages are:
If you don’t own a residence, it could be quite difficult for you to purchase a buy-to-let mortgage. Lenders are very careful about who they give out the mortgage to. They usually prefer someone who is capable enough to return the mortgage and not having a property on your behalf weakens your case.
Similarly, if you own a property, it will help you a lot with accessing a mortgage.
You should also know that most people purchase buy-to-let mortgages on an interest basis instead of taking the capital repayment.
More information on renting rules buy Govt. of the UK can be found here https://www.gov.uk/renting-out-a-property