Buy to Let Explained
What is a buy to let mortgage?
A buy to let mortgage is a mortgage for purchasing residential property with the specific aim of letting it to tenants. Buy to let mortgages have been around since 1993 when the Association of Residential Letting Agents coined the term. Before then landlords and residential property investors used commercial mortgages to buy property to rent to tenants. In general buy to let mortgage lenders operate according to short term strategic business targets, setting up lending pools for each particular mortgage product. When these pools become empty the product is withdrawn from the market.
Borrowing criteria
Unlike residential mortgages which are calculated on the basis of the applicant’s salary, buy to let mortgages operate differently. The mortgage lender applies a rent to interest (RTI) cover calculation. This means the borrower must be able to prove they can obtain enough rental income from the tenant to cover the interest on the mortgage. RTI cover amounts vary between lenders and are normally between 100% and 130% of the monthly interest payment. These days lenders prefer that first time landlords and those with a small portfolio of property also have a non-related income of a minimum of £25,000 pa (sometimes more) in addition to income from rent.
Like any other mortgage, the borrower must put up a deposit for the property. Currently buy to let mortgages are available up to 85 per cent loan to value (LTV), meaning the borrower would have to put up a deposit of 15 per cent. However, 75% LTV is a more realistically achievable figure.
Interest only or repayment terms
The decision of whether an investor chooses an interest only or repayment (capital and interest) buy to let mortgage will very much depend on the individual's investment strategy. The repayment route is often suited to investors using property as an alternative pension plan or looking to build a small property portfolio. With monthly capital and interest repayments, the investor can be sure that at the end of the mortgage term the full loan is repaid.
The interest only route is usually more popular with professional landlords and property investors for two main reasons. Firstly, with an interest only strategy the investor's aim is usually to continue building a sizeable portfolio of property. By choosing this strategy the investor has the cashflow to re-gear their property capital in order to increase their number of properties. This is usually a long term strategy. At the end of the mortgage term, the property is usually sold to repay the initial advance. Secondly, there are certain tax advantages as interest due on buy to let mortgages can be off-set against tax. We recommend that you seek professional advice from a qualified accountant regarding the tax incentives available.
Regulation
Unlike domestic residential mortgages, buy to let mortgages are not regulated by the FSA (Financial Services Authority). Some buy to let mortgages are not available on the high street and can only be accessed via intermediaries such as Mortgages for Business. Mortgages for Business is a member of the National Association of Commercial Finance Brokers, a self-regulating body that has a strict code of conduct. If you are unsatisfied with our service, you can contact the to make a formal complaint.
How can Mortgages for Business help?
As a mortgage broker with access to the whole buy to let and commercial mortgage market, we are independent of lenders and therefore are impartial, so we will be able to use our expertise to recommend the correct mortgage for you. Before selecting any mortgage broker it is essential to check that they are independent, otherwise you may not receive unbiased advice.
At Mortgages for Business we are in the privileged position of being able to access exclusive and semi-exclusive buy to let products that are only available via a limited number of intermediaries including ourselves. In addition, our business volumes enables us to offer our clients preferential processing treatment by the lenders.
As well as our expert advice, we have created this website to help you understand the buy to let arena including market conditions, lenders, products, processes and the private rented sector (PRS). Our aim is to help you to make informed investment descisions.
Buy to Mortgage Calculator
To help you find the right buy to let mortgage for you, why not use our Buy to Let Mortgage Calculator which sources the latest buy to let mortgages and matches the right ones to your circumstances and requirements.
