Buy to let mortgages are designed specifically for purchasing properties that you intend to rent out. It’s not the same as a regular home loan.
A buy to let mortgage is a loan designed for individuals who want to buy property as an investment, rather than as a place to live. The property is then rented out to tenants, and the rental income can be used to cover the mortgage repayments.
Due to the greater risks involved, interest rates are usually higher and the minimum deposit is typically around 25% of the property’s value, although this can vary. The lender will use the potential rental income from the property to determine the maximum loan amount available and will apply “stress-testing” to ensure the rent can cover the mortgage payments if interest rates were to increase in the future.
There are also more complex solutions which serve a different purpose and is suited to different circumstances. It’s important to understand the specifics of each before deciding which is the best fit for your situation.
A Special Purpose Vehicle (SPV) Buy-to-Let mortgage is a loan held within a limited company. Instead of owning the buy-to-let property personally, you incorporate it. The limited company is set up purely to own and manage the property on your behalf. This type of mortgage could be your path to a financially successful buy-to-let investment. SPV limited company mortgages can be more tax-efficient than owning property personally.
You can read more information on our blog: The Benefits of Using a Ltd Company SPV for Buy to Let Property Investment
House-in-Multiple-Occupation (HMO) mortgages are designed for landlords renting out a property to a group of tenants who are not part of the same family or household. Typically, you need an HMO mortgage if you’re planning on renting the property you’re buying to three or more individuals. HMO properties provide great investment opportunities for landlords because of the higher returns possible from multiple tenants.
Regulated buy to let mortgages are used when a property is rented to an immediate family member. The term ‘regulated’ is used because conventional buy-to-let mortgages aren’t regulated. If a buy-to-let mortgage is regulated, it falls under tighter guidelines as opposed to a regular buy-to-let. This type of mortgage is for a property that you or a member of your family will occupy either now or in the future.
As a potential or experienced property investor, you will probably have a lot of questions and concerns regarding buy to let mortgages.
By having an initial discussion with a mortgage adviser, we can answer your questions and guide you through the process to make sure you can move forward with confidence – contact us today.
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Lite Mortgages is a business introducer for PLS Financial Services Ltd, an authorised firm regulated by the Financial Conduct Authority (FCA). With over 15 years of experience as an independent broker, PLS offer a comprehensive range of mortgage services for all types of borrowers and provide free initial mortgage advice.
Their dedicated mortgage brokers are available five days a week, ready to guide you through the application process. With friendly, honest advice and access to a wide range of mortgage products, they provide personalised financial advice to help you attain the best mortgage solution possible by providing the most competitive mortgage deal, tailored to your needs and circumstances.
Yes, it is possible for a first-time buyer to become a buy-to-let landlord. However, obtaining a buy-to-let mortgage as a first-time buyer can sometimes be more challenging compared to a first-time buyer applying for a standard residential mortgage. Here are some key points to consider:
For any buy-to-let mortgage, most lenders will require that the rental income of the property will cover between 125% and 145% of the monthly mortgage repayments.
The more you earn, the higher the amount that you’ll be able to borrow, as the affordability will not only be based upon rental income.
If you have a secure income that earns additional bonuses, you are in the strongest position to borrow funds for a BTL property.
Please note that if your first property isn’t one that you will live in yourself, you won’t qualify for first-time buyer stamp duty relief.
When buying a buy-to-let property you will likely pay more Stamp Duty. In 2016 Government brought in changes to the rates of Stamp Duty.
Anyone purchasing an additional property will have an extra surcharge of 3% added to the current Stamp Duty Rates. To calculate how much Stamp Duty you may need to pay, try our Stamp Duty Calculator.
The monthly payment is crucial for calculating the property’s profit. It’s vital to have the right mortgage for your needs. Many buy-to-let mortgages have an end date when the loan switches to a higher lender rate. Borrowers often explore new lenders or consider switching.
We also check if your current lender can offer a better deal. We recommend what suits your needs, but there’s no guarantee of continuous rental income covering the mortgage. Staying with your current lender may have benefits, like no extra checks or paperwork, and possibly no need for property valuation or solicitor fees.
For those buy-to-let investors who find themselves with a history of bad credit, this could seem impossible. The good news is that there are lenders in the market that will look to assist these potential investors.
A mortgage product or arrangement fee is a payment you make to your lender to cover the administrative costs of setting up your mortgage loan. Often called an ‘arrangement’ or ‘product’ fee, lenders charge this to establish a mortgage deal. The fee varies, typically ranging from £0 to £2,000, depending on the selected mortgage deal.
A mortgage valuation fee is a charge that covers the cost of assessing the value of the property you plan to purchase. This assessment, known as a mortgage valuation, is carried out by a certified surveyor or determined using an Automated Valuation Model (AVM). The objective of this valuation is to validate the property’s value and confirm if it qualifies as suitable collateral for the mortgage you’ve applied for.
The cost of the valuation survey varies depending on the lender and the purchase price of the property. You should budget approximately £300 for this expense, but it could be higher if you’re purchasing a high-value property. In some cases, the lender might include the valuation at no additional cost.
It’s crucial to understand that this valuation is conducted solely for the lender’s benefit and for mortgage lending purposes, not for yours. It’s distinct from other valuations that you can arrange separately, such as:
A booking fee, sometimes referred to as an application or reservation fee, is a charge that certain lenders impose when you apply for a mortgage. This fee is utilised to secure the loan during the processing of your application. It typically ranges from £100 to £300 and is required to be paid upfront. However, it’s worth noting that this fee is not common with most mortgage deals.
A telegraphic transfer fee, also known as the CHAPS (Clearing House Automated Payment System) fee, is a charge associated with a mortgage. This fee is intended to cover the costs your mortgage lender incurs when transferring the mortgage funds to the seller’s solicitor, thereby facilitating a same-day transfer between banks.
This fee is typically paid when you are ready to finalize the deal. It is commonly either added to the total mortgage amount or deducted from the balance received. The cost for this service generally ranges from £25 to £50.
When you use a mortgage broker, you may need to pay a fee for their services, which include arranging the mortgage and providing advice. However, the specifics can vary. Some brokers charge a fixed fee and others charge a percentage of the loan amount.
Solicitor fees associated with mortgages are charges you incur for the legal services provided by a solicitor or conveyancer when buying a house. These services can encompass tasks such as conducting local searches and transferring the funds to complete your property purchase. If you wish to learn more about the different steps involved in the process of moving home, explore our blog post. It aims to simplify the conveyancing process for you.
The cost of these fees can fluctuate significantly, depending on the complexity of the transaction and the value of the property. On average, in the UK, solicitor fees for purchasing a house, including disbursements, amount to approximately £2,339. However, the cost will depend on the value, location, and type of property you wish to purchase.
Before proceeding, it is important to obtain a detailed quote from your solicitor or conveyancer to ensure you fully understand all the associated costs. A mortgage broker can help you with this!
This tax usually has to be paid whenever you buy a property in the UK. But how much you pay depends on your personal circumstances, the property price, and where your home is in the UK. Use our Stamp Duty Calculator to find out how much may be owed in your specific situation.
Yes, you can get a mortgage if you have irregular income, but the reason for the irregularity is important. Here are a few guidelines:
As an employed person with a permanent contract, mortgage lenders will verify your annual basic salary and use an average of any regular overtime, commission or bonus (usually for 3 months).
If you have no minimum guaranteed working hours, the average used will depend on the lender and all will require a minimum employment history of 12 months in the same job role.
If you are self-employed, mortgage lenders will require a minimum 12 months trading and one year’s accounts. The self-employed income declared for tax purposes on an SA302/tax calculation will be used. Most mortgage lenders will use an average of the latest 2 years self-employed figures or the latest years if it is lower.
If you are a limited company director or have a large shareholding you will also be treated as self-employed. Similar to above, the lenders will require a minimum 12 months trading and one year’s accounts. The self-employed income being salary + dividends or net profit declared for tax purposes on your SA302/tax calculation and final certified company accounts can be used.
For more information regarding your own individual circumstance, speak to a mortgage adviser today.
An individuals credit score plays a crucial role in determining your ability to get a mortgage. This is due to mainstream lenders using your credit score, among other factors, to assess your creditworthiness and the level of risk associated with lending you money for a mortgage. However, it is important to note, mortgage lenders will have their own in-house scoring systems you will need to pass and this is when our experience and knowledge will help massively.
Here’s how your credit score impacts your ability to get a mortgage:
To improve your chances of getting a mortgage with favourable terms, it’s essential to maintain a good credit score. You can do this by:
Before applying for a mortgage, it’s a good idea to review your credit report for accuracy and address any discrepancies or negative marks.
The good news is even with a poor credit score or adverse credit, there are specialist mortgage lenders who can look to help and do not credit score. Instead, will have set lending criteria you will need to meet, which is why the credit report is important in this situation.
There are several types of mortgage interest rates available to borrowers. Each type offers different advantages and considerations. The main types of mortgage interest rates include:
Each type of mortgage interest rate has its pros and cons, and the most suitable option for you will depend on your individual financial circumstances, risk tolerance, and preferences for stability or flexibility. This is why it is important to speak to a mortgage adviser at PLS Financial Services today.
An Agreement in Principle (AIP) and a Formal Mortgage Offer are two distinct stages in the mortgage application process, each serving a different purpose. Let’s understand the difference between them:
1. Mortgage Agreement in Principle (AIP):
An Agreement in Principle (AIP) is also commonly known as a Decision in Principle (DIP) or a Mortgage in Principle (MIP). It is a preliminary indication from a lender of how much they may be willing to lend you based on an initial assessment of your financial situation. The AIP helps you get an idea of your borrowing potential before making an offer on a property.
To obtain an AIP, you typically provide basic financial information to the lender, such as your income, employment status, and existing debts. The lender then performs a soft credit check (a check that does not impact your credit score) to assess your creditworthiness. Based on this initial assessment, the lender offers an indication of the amount they may be willing to lend you.
An AIP does not guarantee that you will receive a formal mortgage offer. It is only an indication of the lender’s potential willingness to lend, subject to further verification and a full mortgage application.
2. Formal Mortgage Offer:
A formal mortgage offer is issued by the lender once they have completed a comprehensive assessment of your application. It sets out the specific terms and conditions of the mortgage, including the loan amount, interest rate, repayment schedule, and any special conditions.
To receive a formal mortgage offer, you must submit a complete mortgage application to the lender. The lender will then conduct a more detailed assessment, including a thorough credit check, verification of your income and financial documentation, and other relevant checks. Once they are satisfied with your application and all necessary checks, they issue the formal mortgage offer.
A mortgage offer or principle is not a legally binding contract. The lender still has the right to withdraw the offer, although this is rare. It is important to read the offer carefully and understand the conditions stated. Your solicitor will sort out all of the legal steps involved in purchasing a new property, known as conveyancing – see our blog on the conveyancing process here.
The process of buying a house becomes legally binding at the exchange of contracts stage. This is when both the buyer and seller are legally committed to the sale. After contracts are exchanged, the seller must sell, and the buyer must buy at the agreed price. If either party pulls out after this point, they could face serious legal consequences.
Before this stage, either party can withdraw from the sale without any major legal implications. However, once contracts are exchanged, pulling out of the transaction could result in the loss of the deposit, and the party in breach may be sued.
It’s important to note that the exchange of contracts is usually handled by solicitors and often takes place a few weeks before completion. The completion date, which is when the property officially changes ownership and the money is transferred, is usually set for a specific date during the exchange of contracts.
Residential:
The amount you can borrow for a mortgage depends on several factors, including your income, credit history, monthly expenses, and the lender’s criteria. Typically, lenders use an affordability assessment to determine the maximum loan amount they can offer you. This assessment ensures that you can comfortably manage mortgage repayments without undue financial strain.
Most lenders consider a loan-to-income (LTI) ratio of up to 4.5. This means that they will typically lend up to 4.5 times your gross annual income. However, some lenders may offer higher LTI ratios for certain borrowers or circumstances.
To get a rough idea of how much you might be able to borrow, you can follow these steps:
For example, if your gross annual income is £40,000, the rough estimate of the maximum mortgage you might be able to borrow would be 40,000 x 4.5 = £180,000.
It’s important to note that this is a simplified calculation, and actual borrowing capacity can vary significantly based on individual circumstances, such as credit score, existing debts, monthly expenses, and lender policies. Additionally, some lenders may consider other factors, such as bonuses, overtime, or self-employed income, when calculating your borrowing capacity.
Buy-to-Let:
For buy-to-let mortgages, stress testing is carried out, but with additional considerations. Lenders typically assess rental income as well as the borrower’s personal income and will use the rental income to determine the maximum borrowing amount available. The stress test usually includes verifying that the rental income can cover the mortgage payments even if interest rates increase. The required rental coverage varies, but lenders may often require rental income to be around 125% to 145% of the mortgage payments.