Buy-to-Let Mortgages - A helpful guide

 

How do you get a buy-to-let mortgage? What type should you go for? How long do they take? We’ll look at one of the more commonly asked questions we get when investors are starting on their property journey.

 

Eligibility for buy-to-let mortgages

Applying for a buy to let mortgage is mainly about the property you’re looking to buy and less about your circumstances. The amount you borrow isn’t tied to your affordability, it’s linked to the property itself and what the lender believes you’ll be able to achieve in rental income over the duration of the mortgage. This is known as a “rental stress” calculation and doesn’t get calculated on your income individually.

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Your finances are checked, of course, credit rating and income are still a factor, so it’s advantageous to have a good credit report, but there are still mortgage solutions available for all circumstances. Brokers can look at these numbers and find you something that works in most cases.

Lenders will prefer homeowners in most cases or have an existing buy-to-let property before they go through the application process. There are options available for first-time buyers/landlords, but these do provide limited opportunities to lenders, and as such, there’s a higher risk associated with them.

Deposits on buy-to-let mortgages

The standard deposit for a buy to let mortgage is 25% which gives you a loan to (LTV) value of 75%. Some lenders will offer you a higher LTV, which results in a lower deposit required. This will have an impact however on your rental stress calculation as it will need you to get a higher return on your rent to make up the amount lent initially, so it’s not often that this is an option used in buy to let mortgages. You can, however, increase the LTV by using your income to make up the shortfall in the rental stress calculations. This is called “top-slicing” in the industry.

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Interest-only or repayment?

Most of our investors go for interest only in this regard. By paying off the interest only, you’ll get a higher rental income each month which is entirely the reason investors go for this model. The risk here is that it’s unlikely you’ll ever pay off the debt as you’ll still owe the same amount on the property at the end as you did at the start. The way this is now offset is that limited company buy to let mortgages can be extended past the age of 70, making the end dates well in the future.

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Limited Company/Individual mortgages

In most cases, you’ll pay more interest if you’re in a limited company mortgage (between 1% – 1.5%) plus any legal work the lender will do for the limited company. There’s a chance you’ll have a higher arrangement fee too, but through tax efficiencies, this can be offset. It’s worth discussing this with a broker or accountant to see how they would structure this for you to ensure maximum returns. This does slow down how quickly the lender can offer, with individual buy-to-let mortgages they’re historically quicker to decide, and you’ll also have to provide a personal guarantee if the company runs into any trouble with funds to pay off the repayment. Again, discuss this with a qualified accountant before making the decision.

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Which buy-to-let mortgage then?

Personal circumstances dictate this massively; there are two main products available; a fixed product where the interest rate remains the same for a significant amount of time or a variable product that changes with the national rates. Variable has two products within, a tracker that aligns with the BoE’s base rate and a discount against the variable rate.

If you’ve spotted a property that you wish to buy quickly as it’s below market value and you need to turn it around quickly, you’ll need a short-term solution. If you’re looking at areas with little capital growth anticipated, you might fix interest for five years.

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The lowest rates don’t always mean the most economical mortgages however if you take into account the other fees you might have to pay such as valuations, product fees, arrangement fees and legal work or cash-back incentives this could eat into any expected revenue. Again, worth checking with a qualified broker to discuss this.

How long do buy-to-let mortgages take?

Generally, between three days and three months for approval. When buying off-plan, this is rarely an issue but when buying property under auction then moving quickly is paramount so you’ll look to speak to the right person to get the mortgage that can be approved as fast as possible.

Speeding up this process can be done by providing your assigned broker with as much information as possible. Providing them location details and making them aware of the speed required can often help as it allows them to work via a process of elimination by identifying lenders that shouldn’t be pursued and ones that do provide what you’re looking for.

Once you’ve had the decision in principle and the property has been identified, then you should get an application agreement. This is where the lender says as an individual or a company that they are satisfied you have met their criteria, and you’re a viable option. Then it comes down to the property itself.

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At the Heaton Group, we do tend to recommend investors go for our off-plan properties as it provides a much better timescale and is more reliable than choosing to invest in an area based on the property price at that time. Going off-market predictions for the postcode isn’t usually the best way of working out where you’d get a return, it’s often the area itself, demand and what properties have historically sold for in the past rather than buying a property spuriously.

When you’ve got an offer and chosen your property, you have to then go through legal, limited company legal proceedings will only begin when you’ve got the offer. The lenders will then instruct their solicitors. To avoid paying double fees, you should look for solicitors that are members of as many lenders panels as you can. Your broker should be able to check this for you.

A good time to invest, then?

The Heaton Group have been enjoying a period of unprecedented growth over the last five years due mainly to developing properties alongside supportive local councils and working with our fantastic investors who are always eager for the next opportunity. We’ve managed to carve out a way of redeveloping properties in a way that means investors are happy; tenants enjoy their way of life.

If you’d like to find out more about our current investment opportunities or wish to speak to us, then please call 01942 251 945 or email info@heatongroup.co.uk.

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