Do you want to become a landlord but don’t own a property outright? If so, you need a buy-to-let mortgage. This applies if you already own a property or if you’re buying a property specifically to rent out.

If you don’t swap your existing residential mortgage to a buy-to-let mortgage when you rent out to tenants, you can face hefty fines or even imprisonment.

The good news is that the process to get a buy to let mortgage is similar to getting a residential one. The only difference is who can get the mortgage. The lending criteria is higher to buy a rental property than it is to buy a single flat or house for you and your family.

So, if you’ve asked yourself, “Can I get a buy to let mortgage?” then this guide is for you.

What is a Buy-to-Let mortgage?

A buy-to-let mortgage, sometimes known as a BTL mortgage, is a loan that’s specifically designed for rental properties. Though rental properties should bring in rental income, that doesn’t make them a guaranteed way to make money. That’s why the criteria for BTL mortgages is higher.

Buy-to-let qualifications

Getting a buy to let mortgage is going to be harder than getting a standard residential mortgage. BTL mortgages have extra eligibility requirements in comparison to residential mortgages. To get a buy-to-let mortgage, you often need to meet these criteria:

·         Deposit requirements

BTL mortgages have higher deposit requirements if you are outright buying a property to rent. How much depends on the lender. The lowest you should expect is 25%, while some lenders require that you have a 40% deposit to qualify.

Technically, this also applies to a property you already own with a residential mortgage. If you want to switch a residential mortgage to a buy-to-let one, for example, you’ll want to have an LTV that’s at least at 75%, if not lower. This means you own 25 to 40% of the property.

·         Great credit score and history

Just as a great credit score and history can help you get a residential mortgage, it can also work towards your BTL mortgage. You will especially want to have never missed a mortgage payment.

·         Age requirements

Many lenders will actually set age limits. Typically, BTL applicants need to be over 18 or 21 years old. They also need to be younger than 70 to 75 years old. This doesn’t mean you can’t rent out properties if you are over 75. Specific age requirements change from lender to lender.

·         Rental income requirements for BTL mortgages

How much you can get as rental income will play a huge part in what you can borrow. This is known as a stress test. Most lenders will expect your rental payments to cover 125 to 145% of the mortgage cost.

This means that a £1000 mortgage will need the rental property to earn £1250 to £1450 per month in rent. The cushion is to give you some wiggle room to keep making repayments if there’s a vacancy, repairs, or interest rates increase.

Want to rent out a larger property?

A standard BTL mortgage covers a single property that houses either a single household or two unrelated tenants. If you want to rent out to three or more unrelated tenants at once, then you will need an HMO mortgage instead.

HMO stands for House of Multiple Occupation. All flat shares are HMOs. With an HMO, flatmates will live together and share communal spaces like a kitchen, living room, and potentially bathrooms.

While the rental returns of an HMO can be higher, you will need to get an HMO license from your local council in order to get an HMO mortgage. In some cases, this may mean buying the property with a BTL mortgage, applying for the HMO license, and then switching to an HMO mortgage.

If this is your plan, then stick with a variable rate mortgage or interest-only type mortgage while you set up the legal matters.

Want to rent out an apartment building?

Apartment buildings, a block of flats – essentially any property with multiple contained flats – will often need a commercial business license.

What types of BTL mortgages can you get?

You can get many different types of buy-to-let mortgages. The right one will depend on your circumstances and what you need:

  1. Fixed term: This means that the interest rate is fixed for a set number of years. If you have a larger deposit or lower LTV, then you’ll be more likely to find lower interest rates than if you have a smaller deposit or high LTV.
  2. Variable: This means you pay the standard variable rate. The SVR is usually higher than fixed rate amounts, but it can go down. For example, if you sign on for a 5-year fixed term, the SVR may go down halfway through.
  3. Interest-only: This means that for a select time, you only pay interest on the property, not the principle. Once the period ends, you’re put on a variable rate and need to pay off both parts of your loan. This can be useful to keep outgoings manageable while you find tenants initially.
  4. Tracker: This means that you pay the rate set by the Bank of England, plus an extra amount on top that acts as your lender’s profit margin.

 

How to switch a mortgage from residential to BTL

You need to inform your lender you intend to rent your property out. If they agree, then they can move your mortgage product. You may need to pay early repayment charges in this case, though it depends on the lender.

If your lender refuses, then you will need to remortgage. If you wait until your fixed term period ends, you can remortgage without an early repayment charge.

 

 

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