A ‘landlord’ or Buy to Let mortgage differs considerably from a standard residential mortgage. For a start it is more difficult to obtain 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.
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Simply put a buy to let mortgage is a specialist mortgage only available to landlord. This is because despite the common misconception, owners are unable to rent out their property simply using a standard residential mortgage as doing so would be in breach of the providers terms and most likely invalidate any existing home insurance policies taken out for the property.
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.
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.
Although the extract time it takes for a buy to let mortgage to be offered will naturally vary between providers, typically landlords can expect to receive an offer between 3 to six weeks after their application. With this being said the global pandemic has left mortgage providers with a significant backlog of applications to approve, meaning that applications are now frequently taking as long as 8 weeks to be approved.
As mentioned, whilst different lenders will have different criteria for landlords they are lending to, many will commonly require the owner of the property to provide at least 3 months’ pay slips and 3 months bank statements before the application can be processed further, potentially causing a delay if these documents cannot be procured immediately.
Further to this the owner will also need to wait for a survey of the rental property to be conducted, typically taking anywhere from 7 to 14 days for the surveyor to complete the valuation. Once this valuation has been completed the underwriter will be able to make a final decision on the owners buy to let application, commonly taking around 17 days for this offer to be received by the landlord. Once this is completed the solicitor will then need to exchange contracts, adding as much as 8 weeks onto the process, but once these have been exchanged the sale is ready to complete.
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