There have been some fundamental changes in the residential mortgage markets with affordability checks now very much the focus of attention when people are applying for a loan.
The standard criteria for a Buy-to-let mortgage has remained fairly unchanged during this period of upheaval and the way that eligibility and lending suitability are assessed remain the same as they have been for some period of time.
In this overview and buy to let mortgage guide, there is a look at the principal differences between a residential mortgage and a loan to finance the purchase of an investment property that will be producing a rental income.
Fit for purpose
A buy to let mortgage is specifically designed for borrowers who want to buy an investment property that they intend to rent out and generate an income from.
Rules do not allow you to obtain a basic residential mortgage and then rent out this property to tenants. Some people keep their existing property when they buy another one and covert their mortgage to a buy to let with their lender, but the vast majority of loans are based on a property that the would-be purchaser has not lived in and does not intend to live in after they buy.
Different lending criteria
The main difference between a residential and buy to let mortgage is that most loans are issued on an interest-only basis, which is no longer the acceptable format for many residential loans.
Lenders who no longer issue interest-only residential mortgages still continue to offer this type of loan in the buy to let market. Another key aspect of a buy to let loan is that the lender will want to consider the potential rental income when they are assessing the affordability of the proposed loan.
When you apply for a residential mortgage to buy a house that you intend to live in yourself, the lender will ask for proof your income and also what your other regular financial commitments are.
With a buy to let mortgage, your financial status is of course highly relevant, but the anticipated rental income will need to be at least 125% of the mortgage payment, and it this income that is crucial to the success of your application.
For example, an anticipated £600 per month mortgage payment will need to be covered by an expected £750 per month rental income in order for the loan to be granted. You will be required to provide evidence of this rental value in order to succeed in obtaining the loan you have applied for.
The loan-to-value ratio is lower with a buy to let mortgage, so you will be required to pay a larger deposit for buying an investment property.
You will be unlikely to find a lender that will offer any more than a maximum of 80% of the purchase price for a buy to let mortgage and you are more likely to get a better rate for your mortgage if you can pay somewhere between 25% and 35% of the purchase price as a deposit.
The fees charged for arranging a loan tend to be higher for buy to let application when compared with residential mortgages.
You should factor this in when you are doing your costings and expect to pay as much as 3.5% of the mortgage amount as an arrangement fee.
Do the maths
Letting a property is a business, even if it is only one rental property that you have.
You need to factor in things like letting agent fees, maintenance costs and annual safety checks to comply with regulations. All of these costs can eat into your profit margins and you also have the cost of buildings insurance to consider as well.
If you are unsure how to properly evaluate the true cost of owning and running a buy to let portfolio, which includes the tax implications of this venture, you should consider employing the services of an accountant with experience in this sector, to help you do the sums accurately and get a clear understanding of all the cost involved for the short and long term of the venture.
Getting a residential mortgage can be a challenge these days, but the same can be said of trying to get a buy to let mortgage.
You may well do better by seeking out a specialist buy to let broker how has experience in the market and knows which lenders might look favourably on your application and who might not, which will save a lot of time and money.
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Scott Baker is a property investment consultant. His articles mainly focus on helping young people make a start in property investments. He enjoys sharing his ideas and research online.
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