Securing a Landlord Mortgage
A ‘landlord’ or Buy to Let mortgage differs considerably from a standard residential mortgage. For a start it is more difficult to contain and, secondly, it will also prove more expensive.
That’s because the buyer will be renting the property out to tenants – either personally or through a letting agent. He or she will already have their own mortgage to pay for where they are currently residing, with the buy to let mortgage being a second mortgage.
If it is your own property that you plan to rent out and you already have a residential mortgage then you have to notify your lender. They will then convert it into the necessary buy to let mortgage.
Is a Buy-to-Let More Expensive Than a Residential Mortgage?
Just like with a residential mortgage, you will require building and contents insurance on a buy to let mortgage. This will have to be for specialist landlord cover though, and which will prove more expensive than standard residential insurance.
Like a residential mortgage the buy to let mortgage has to be paid every month on a regular basis. Some landlords choose to pay just the interest every month and pay the lot off at the end in a bulk sum. Others prefer to pay the capital as well as the interest so that they have a huge amount of equity at the end of the 25-year (or whatever) mortgage term.
How Much Rent Is Needed for a Buy-to-Let Mortgage?
Ideally your tenants will be paying rent monthly and this will be enough to pay the cost of the mortgage as well as any additional expenses (such as marketing the property when tenants move out, or paying for a letting agent to manage it). Typically, lenders like a landlord to be charging tenants 125% of the monthly buy to let mortgage payments.
To get a buy to let mortgage you will have to be prepared to put down at least 20 to 25 per cent deposit. In some cases, you may find that up to 40 per cent is necessary. A larger deposit certainly makes more sense when it comes to calculating whether or not the buy to let mortgage payments will be feasible in the lender’s eyes.
The interest on a buy to let mortgage will also be higher than a residential mortgage. It is often two per cent higher, in fact. Then there is Stamp Duty to think about. Although the UK government is currently offering a ‘stamp duty holiday’ for buyers of property in England up to £500,000 in value, landlords will still have to pay a three per cent Stamp Duty charge because the property is their second home. Your letting agent can advise you about this.
We mentioned above the 125 per cent rent/mortgage ratio. This is all considered in the lender’s Interest Cover Ratio (ICR) calculations. Then there is the ‘stress rate.’ This is when a potential lender adds in the possibility of an interest rate rise to see whether you can still afford the buy to let mortgage based on your current rent calculations etc.
You will usually have to find a specialist mortgage broker who deals in buy to let mortgages in order to process your application. Want to find some information about properties to let in your neighbourhood? Then see our online letting agent portal PropertyLoop. It helps landlords to find the right tenants by listing their properties online. In fact, it’s the easiest way to get your property to the market, especially given the pandemic situation we are in at the moment.
The platform simply connects the demand with supply, allowing the landlords to chat to their tenants and prospects renters on the platform without the need of exchanging contact details. Receiving offers and concluding the deals is also taken care of by the smart technology and is done remotely. Forget about the middleman, complexities of the legacy “brick and mortar” agents and communication errors. Our seamless platform experience, intuitive interface and powerful functionality simply does it all for you in three simple steps – list your property, wait for the offers to come in, and rent it, and get paid.
As a landlord you will gain passive monthly rental income from your buy to let and capital appreciation as the years flit past. And it’s exactly this capital appreciation ...
February 12, 2021
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