Buy-to-let – mortgages for renting out property

Buying a property in the UK for the purpose of renting it out is a simpler process than buying a home to live in on your own. It is on the further planned use, depend on the amount of the loan granted and its interest. A high interest rate pledged by banks will cover any expenses in case of unforeseen circumstances. It is important to study in detail all the criteria that are checked by the bank before approving the application, as well as to choose the most favourable object on the property market to have a high chance of a positive decision.

Why is there a difference between a mortgage on my own home and a mortgage on a rental property?

Differences in the processing of the application by banks occur because of the different approach to the subsequent repayment of the mortgage.

In the case of buying a home for personal residence, the bank finds out the amount of your income and how much you will be able to repay. The borrower is given a maximum of five annual salaries for a mortgage and the loan is repaid with the money earned by the borrower.

When buying a home Buy-to-let , nobody cares what your salary is, as long as you have enough to cover your own needs. When renting, the loan is repaid from the money received from the tenant. Moreover, a properly drafted contract will oblige the tenant to participate in the maintenance of the flat or house.

You need to keep in mind that most often in buy-to-let, mortgages are issued on the condition of paying only interest, without paying the balance of the loan.

So, you don’t need to earn a large income to afford a Buy-to-let mortgage and you could borrow more money for an investment property than to buy your own home.

Is it possible to take out a mortgage agreement to buy a personal home and then rent it out after a while?

This possibility exists, because life is multifaceted and changeable: the purchaser may have personal circumstances change over the years of the mortgage, for example, a wedding or divorce, a long-term business trip, etc. The right thing to do in such a situation would be to notify the bank of changes in the terms of the contract and renegotiate it as Buy-to-Let.

Difficulties will also arise in the opposite situation, when the property was bought for the purpose of renting, and the buyer decides to make it his residence. In this case, the bank will also need to be notified and the contract will need to be revised.

Criteria by which banking organisations consider applications

Each bank has its own limits on the parameters presented, but all are subject to review and have their own acceptable limits for approval.

1. Amount of deposit to be made

When applying for a loan, a certain deposit is required. While for a mortgage taken for personal residence, this amount starts at 5%, a Buy-to-Let loan is between 25-35%. It is very rare to see offers with a deposit of 20%, but it does happen. The higher the deposit, the less interest the bank will charge.

2. The amount of the borrower’s income

The amount of income for the year of the person wishing to take out a mortgage for further rent should not be less than £20,000, while when applying for a loan for your own residence usually the total approved amount of the loan does not exceed the annual salary multiplied by a coefficient of 4.5.

When it comes to a foreign citizen who wants to buy a property with a mortgage, banks are particularly careful and ask to specify in the application all existing sources of income, as well as attach supporting documents to them. The greater the total amount of wages, the greater the chances of getting a loan for the right flat.

3. Estimating the potential rent

During the mortgage application process, the bank assesses the area to be purchased in terms of the approximate amount the tenant will pay. To be approved, the property must be sufficiently profitable for the owner to be able to rent it out at a 25-45% mark-up. For example, if a monthly payment of £1000 is planned, then the tenant must pay at least £1250. Such a requirement is due to the existence of intervals in which the flat will be empty and looking for the next tenants: at the expense of deferred funds can continue to pay the mortgage, without allowing delays. You can get a minimum mark-up in the calculations by taking out landlord insurance to cover mortgage payments during the absence of tenants or their insolvency.

4. Age restrictions

In contrast, banks are as loyal as possible in this screening criterion. The age of the person applying for the loan is irrelevant, with most organisations having no limits other than setting the age of majority (21).

5. Credit history

Having a good credit history, especially if there have already been any loans, successfully and without delays repaid, is a good help in getting approval for a Buy-to-Let loan. Also do not forget about current loans for any purpose: the bank needs to make sure that the borrower is able to pay both current loans and mortgages on time.

Government supervision

Renting out property is considered by the UK authorities to be a business organisation. Therefore, the Financial Conduct Authority, which oversees consumer goods, does not extend its influence to Buy-to-Let mortgages. An exception to this is if you have purchased a flat to rent out to family members.

Taxation

Buy-to-Let mortgages are subject to all subsequent taxes that are relevant to the business activity. You can read more about their list in other articles of the site or by contacting a competent lawyer.

Additional payments when taking out a Buy-to-Let mortgage

Mortgage costs are slightly higher than the loan amount itself, as they entail the following fees:

• application fee – a loan for a flat with subsequent renting out requires a larger amount than a buy-to-let mortgage, it is worth finding out the exact amount from your chosen lending organisation,
• the cost of legal support of the transaction, as in the UK it is impossible to buy any property directly from the seller – each purchase goes through a realtor,
• stamp duty paid to the state. Its amount depends on the value of the purchased flat, as well as in calculating the amount may apply an increasing coefficient if we are talking about the acquisition of additional property in addition to the existing single home. For example, for an object worth from £40 thousand, in England and Northern Ireland you will have to pay 3% of its value, in Scotland – 6%, and in Wales – 4%.

Refinancing a mortgage

Conventionally, the period of validity of the loan agreement can be divided into two stages:

1. fixed rate action – usually set for the first few years,
2. transition to the lender’s variable interest rate.

If the first part is characterised by clear and fixed payments, it is difficult to predict the amount of the next payments during the floating period . And also the amount of overpayments on the loan can turn out to be much higher when the payments depend on the interest rate applied at that moment in a particular bank.

In order to avoid such difficulties, it is possible at the end of the fixed rate to request from the bank to change the contract in terms of its extension or to go through the procedure of renegotiation of the mortgage deal (refinancing). In the case of refinancing, it is possible to contribute additional capital in order to reduce the amount of the deal, as well as to choose the new most favourable terms of the contract.