If you’re thinking about buying a property in order to let it out, then you may need a buy-to-let mortgage. These mortgages work in a similar way to regular residential mortgages but there are some important differences that you need to know about.
Getting a buy-to-let mortgage
Checking your eligibility
Your lender will use specific buy-to-let criteria to assess your eligibility, these may include age restrictions and minimum income levels (usually around £25,000 to £30,000) that you’ll need to meet.
You should get an agreement in principle
Before you start your buy-to-let mortgage application you might benefit from an agreement in principle. An AIP is a handy indicator of how much money your lender is happy to give you and in turn how much you can spend on a property.
Having an AIP shows vendors and estate agents that you’re serious and can afford the property that you’re looking at. Do bear in mind, however, that your agreement in principle is only valid for 90 days and you may need to renew it if you’re still looking for a suitable place after that time period.
Contact your lender
You then need to speak to your bank or lender to find the best mortgage deal for you. This meeting is usually the start of the application process.
Applying for the mortgage
During this application meeting, you’ll give your lender all the information on your finances and the property you’re hoping to buy. If you already have rental properties, you’ll need to show the lender how much income you’re getting from them.
Wait for the mortgage offer to process
It usually takes three or four weeks for a lender to process your application as it involves a full credit check and also a valuation on the property you’re looking at.
How do lenders calculate buy-to-let mortgage affordability?
This is where things differ from residential mortgages. Your lender will look at how much rental income you’re likely to get from the property, rather than just your salary and expenses.
You can estimate your rental yield, which is the amount of rental income expressed as a percentage of the property’s value. Yields of 5-8% are usually seen as good (or very good), so aim for this sort of figure.
What about the deposit?
If you’re not a cash buyer then you’ll need a mortgage, which means that you’ll need a deposit. Buy-to-let deposits are larger than residential mortgage deposits – usually around 25% rather than the 10% you often need for a residential home loan.
Are there interest-only buy-to-let products?
There are interest-only BTL mortgages and many landlords use them so that they’re keeping more of the rental income each month. However, you’ll still need to pay off the outstanding amount at the end of the term, which often means selling the property.
Deciding on a repayment or interest-only loan is something your lender can help you with.
Finding the best buy-to-let mortgage rates
You should shop around and speak to a number of mortgage brokers to find out which products are available and which ones will work best for you. You may also need to work on your credit score so that you can get better rates of interest on your home loan options.
Can I convert my residential home loan to a BTL mortgage?
If you’re moving from your home but you don’t want to sell it – maybe you’re working abroad for a few years – then letting the property out is a popular solution.
Speak to your mortgage provider to find out what your options are. As long as you meet the criteria and your property will offer a decent yield, then you can probably convert. You might need to remortgage in order to switch to a BTL product, which sometimes involves early repayment charges, so do factor this in your calculations.
