Investing in residential property as a landlord continues to appeal to many and you can put your best foot forward by securing the best buy to let mortgage to help pay for your property investment.
Even though the conveyancing process is the same as for a residential purchase a buy to let mortgage application has clear differences from when you apply for a residential mortgage.
What follows examines these differences, gives tips and shows some pitfalls you’ll want to avoid if you’re taking your first step into residential property investment.
Check you’re actually eligible for a Buy to Let Mortgage
At a base level, you’ll have to satisfy your prospective buy to let mortgage lender of the following when you come to apply:
- Your rental income exceeds the mortgage
- Your deposit is a minimum of 25% of the property’s selling price
- Your credit score is ranked as ‘good’ at the very least
- You will be aged at most 70 to 75-years-old or under at the end of the mortgage term
- You own a residential home of your own
How do Buy to Let Mortgages and Residential Mortgages differ?
Buy to let mortgages normally differ in the following ways from residential mortgages:
- You can expect higher interest rates in comparison
- Accompanying costs of mortgage valuations and product fees are normally greater
- You need to have a minimum 25% deposit
- They are normally granted on an ‘interest only’ basis: you aren’t compelled to pay off any of the principle each month but when the term finishes, you’ll have to pay off the whole sum entirely and have to plan for this
- You are regarded as a ‘sophisticated investor’ by the Financial Conduct Authority (FCA) which means that you won’t benefit from the consumer protection which accompanies residential mortgages: most products are not FCA-regulated.
How Much Can You Borrow Using a Buy to Let Mortgage?
When calculating how much you can borrow, a prospective lender reviews your application using a variety of methods, involving both computer algorithms and manual inspection.
We’ve listed the main criteria here:
Deposit– As stated previously, this needs to be a minimum of 25% of the selling price and the more you reduce the loan-to-value ratio, the lower – and cheaper – the interest rate you will get.
Rental Income– The higher your projected rental income is adjudged to be, the more mortgage you’re likely to be granted. You can expect a lender to require this income to be 25-30% higher than the value of your required monthly mortgage repayments. Additionally, lenders are required to stress test whether you can still afford repayments if the Bank of England base rate was to rise by 4 to 5%. You therefore need to provide as much evidence as you can that your projected rental income is realistic. Ideally this would come from existing tenants but, failing that, from local letting agents.
Who Should You Approach for a Buy to Let Mortgage?
Naturally you can approach any lender offering this facility. You may wish, however, to consider initially approaching an independent mortgage broker with access to the whole of the market of mortgage products.
There are more than 3,000 mortgage products in existence so it’s well worth having an expert on your side to select the right product for you and one for which there is more likelihood of your application being successful.
Depending on the broker you choose, you may have to pay them directly but they may get their remuneration purely from the lender involved when your mortgage goes ahead.
Final tip: Instruct an Experienced Buy to Let Conveyancing Solicitor!
Although we stated at the beginning of the article that the conveyancing process for buying a property, whether for investment or for living in, is the same, property lawyer experience is always at a premium and it’s no exception when you come to instruct a buy to let conveyancing solicitor.
A solicitor with experience will know more about raising the kind of enquiries which are specific to the buy to let market and additionally will know about the differences which accompany interest-only mortgages which have been removed from the residential market for some years.