What is Buy to Let?
Buy to Let (BTL) loans and mortgages have been designed for current or aspiring landlords looking to build their portfolio. There are many different circumstances when you may be applying for BTL funding. As a result, there are various buy to let products on the market. However, there are still some criteria that must be met for you to get a BTL related product. Chiefly, you must be buying a property with the sole intention of letting it out. It also aids applications if you have experience with letting out a property, however even if you don’t you may still be able to get a BTL product. Specialist BTL brokers which offer the complete range of products (not just mortgages) can help you to find the best product for you.
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Lenders also use various stress tests to determine whether to lend or not. The first of these is the interest coverage ratio (ICR). This is when the lender calculates if you can afford the repayments at a higher interest rate. For example, if your interest rate is 2% on a loan of £100,000, interest only repayments are £2,000. So the lender will calculate whether you can afford an increased interest rate, usually at least 5%, or 1.5% increase on your standard rate, whichever is higher. In this example a 5% interest rate is higher, so they will find out if you can afford interest only repayments of £5,000 instead of £2,000.
The other stress test used is rental cover. For this test, the lender is seeing whether the property being bought will make enough rental income to cover mortgage repayments. For example, we take the above example of an ICR of 5% on a £100,000 mortgage. The lender may then add a rental cover of 120%. To calculate 120% ICR we multiply the £5,000 by 1.2, which equals £6,000. This means that the property will have to make at least £6,000 in rent annually. A rental cover of 120%, however, is quite generous, with many going up to 165% or beyond. Circumstances that may affect this could be whether you buy personally or with a Limited Company, your personal taxable income, or the number/type of units being bought.
You may fail the stress test for certain lenders but be accepted for others. This is one of the areas where are broker will add value by firstly helping you present you application, and knowing which lenders will accept it.
Limited company or personally owned
Following recent tax changes more people are buying their BLT property within a limited company structure. Whilst this may be tax efficient it does restrict the choice of lenders and can result in higher interest rates. However their also pro’s and con’s for owning the property in your personal name.
As a landlord you need to consider your long term intentions and reasons for owning buy to let property. Is it a one off or will this be a big thing? Are you more interested in income or capital growth? Will you hold the properties for a long time or is it more about realising profit on sale? How important is inheritance tax and other tax planning.
There is no simple answer as everyone’s circumstances are different but the more of your time and money you plan to invest in property ownership, the more important it is that you invest in expert advice. That’s where the opinions of both a tax adviser and a mortgage broker can be critical.
Types of Buy to Let
Buy to Let Mortgage
Buy to let mortgages are the most common product available. When buying a property to rent out, you cannot take out a normal mortgage. Therefore, a specialist BTL mortgage may the best way for you to get a mortgage on your buy to let property.
Many BTL mortgages are interest only. This means that over the term of the mortgage, you will only pay the interest on the mortgage. As a result, by the end of the mortgage, you will still have to repay the full amount. However, it is possible to get BTL mortgages on a repayment basis as well. If you do not go for this option, it is very important to have a repayment plan for the mortgage.
Landlords tend to encounter all sorts of challenges which are determined by their circumstances or the property type. Fortunately there products to deal with most scenarios, the most common of which include the following:
- First time landlord
- Meeting affordability criteria
- Problems with credit history
- Non standard construction or unmortgageable
- Larger deposit needed
- Paying for refurbishment before letting
Some of these solutions are covered on this website. However, nothing beats a conversation with an expert who has detailed knowledge of the products available and how they might fit your circumstances. It may be that your circumstances require a combination of products to get you the best results.
Commercial Buy to Let
How is it different
The term commercial mortgage can be very broad but is usually taken to mean a mortgage taken on commercial or multiple properties. However in a commercial buy to let scenario it normally relates to property which contains multiple separate properties under one loan or property rented to a business rather than an individual. It also is applicable where the property has a commercial element. This is most typically found where a shop has a flat above and both are leased out separately. A regular BTL lender wont consider this.
Not to be confused with a limited company buy to let mortgage, a typical commercial mortgage might be used to refinance a development loan following the conversion of a building to a number of residential flats. The development may have been funded with short term development finance but on completion remortgaged on to a commercial buy to let mortgage. This is also known as a development exit.
There are a few key differences between residential and commercial buy to lets. First of all, the tenant. As already touched upon, if you let to a business, you cannot take out a residential BTL mortgage. As well as this, commercial BTL rates are generally higher than personally owned residential property. This may be because they are seen as greater risk. In addition, you may need a larger deposit, with most lenders requiring a deposit of at least 25% of the property value.
How to get one
The first stage is to find a lender for you. Many lenders are more risk-wary when lending to certain types of commercial properties. It can be hard to understand all the lenders criteria. Some like semi commercial with a mix of commercial and residential use. The biggest differences between commercial BTL lenders are their attitudes toward affordability, experience and credit history. Promise Moneys commercial experts can help you find a lender that could work for your circumstances.
In order to get the most favourable rates, a larger deposit is recommended. The minimum deposit normally accepted is around 25%-30% of the value of property. However, much more favourable rates will be available if a deposit of 40% is given. If the rest of your application is airtight, then you will have access to the most favourable rates with few additional fees.
The next step is to determine if your property will generate enough rent. This is done using the stress tests as above. Stress tests for commercial properties are generally stricter, with normal rental cover being around 125% to 145% of the stressed mortgage repayments. However high street lenders, which offer the lower rates, often look for a rental coverage closer to 200%. The mortgage repayments may depend on many factors. These include, but are not limited to: the loan to value (LTV) ratio, the lender, your credit history, the commercial tenant you aim to/already have, and your affordability.
If you already have a tenant this will greatly help your application, as you have proved you already have rental income to support the loan. However, each lender has different criteria, and some will consider helping you buy the property with no tenant in place. This can be vital if you want to refurbish before renting but be prepared to prove that you can afford the mortgage, including any stress tests, whilst the property is empty.
Buy to let bridging
How is it different
Bridging finance is a lot more flexible than many other forms of loans and mortgages. This is because they are short term, with lenders generally being open to higher risk projects. Bridging loans are used to cover the gap between buying something, and receiving funds from selling something. So bridging mortgages are designed to allow a landlord to buy a property that they’d normally struggle to finance with a standard mortgage. Typical scenarios include:
- Buying an unmortgagable property
- Refurbishing before letting and remortgaging
- Chain breaking – buying before you have sold
- Quick purchase – including auctions
- Buying to split the property title before remortgaging
For this loan, however, the lender requires borrowers to have a exit plan. This can be either selling the property, or refinancing onto a different mortgage type. With bridge to lets, this normally takes the form of refinancing onto a more traditional buy to let mortgage.
There are some major differences between traditional buy to lets and bridge to lets. First of all, it can be much faster to get a bridge to let. This can be as quick as a few days up to a couple of weeks, instead of the normal few months for standard buy to lets. As well as this, bridge to lets allow you to break the chain of sale. Sometimes you want to buy a new property, but are relying on the sale of your current property. Bridge to lets negate this, allowing you to move forward with the purchase without having to wait. Bridging lenders can also be much more flexible, making it easier to find a deal that works for you.
However, bridging loans usually come with higher interest, and a definite end date often within 18 months to 2 years. So for longer term borrowing this may not be ideal. You may also need to provide substantial collateral to qualify, which may make it harder to get bridge to let mortgage. Finally, many lenders charge a wide variety of fees, which all add up, making the cost larger than expected.
Rolled up / retained interest
With most bridging loans there is an option to include the interest payments within the loan. Having no payments to worry about can really help with cash flow but the interest forms part of the loan as is repaid on exit. Because it forms part of the loan it will reduce the amount you get in hand at the start by this amount
Bridging is considered expensive and that is comparitively true with rates varying typically from just below 0.5% per month and 1% per month. However, lenders have a short time to make profit before the loan is paid back and the risk is high. That’s why bridging needs to be considered as part of the cost of the overall profitability. Getting hung up on rates is unhelpful.
If taking a bridging loan helps you make more profit by buying cheaper, letting faster or converting to a regular mortgage quickly its likely to make financial sense.
Bridge to Let mortgages
Some specialist lenders offer a bridging loan which is agreed at the outset to convert to a BTL mortgage at a certain point with the same lender.
The advantages of this are that you know you have the exit mortgage pre-approved and it can reduce some of the application costs as it is all part of one application. However, because this approach restricts your choice you may end up with a less competitive rates on both your bridging loan and your eventual mortgage. Consequently its worth looking at but most property investors and landlords treat these as two separate transactions with different lenders.
How to get a one
Bridging lenders assess different criteria than most other lenders. Of course they want to know about the value and condition of the property. However, one of the most important factors is whether you can exit the bridge at the end of the agreed term.
Therefore lenders will look at your previous experience, both in being a landlord and in renovating properties. This is more important if the property you are buying needs extensive work before it can be let out.
If your proposed exit strategy is refinancing they will also want your broker to evidence that he can refinance you. So if you have a bad credit history and no chance of getting a buy to let mortgage, a bridging lender would still consider you but only if your planned exist is to sell the property.
Other factors that may affect your ability to get a bridge to let mortgage are firstly whether you have other assets. Secondly, your ability to pay the interest on monthly instalments, or whether you will pay the interest in one lump sum by including the interest in the loan.
Additionally, whether the property can be sold even if you don’t finish your renovations is important, in case the lender needs to recoup their money. Personal information such as your credit history, your age, and various others will also affect your chances and rates offered.
It can be hard to navigate all of these criteria, so Promise Money can offer advice and support in your application. Contact Promise Money now to find out your eligibilty.
Buy to Let Secured loan
How is it different
A secured loan, or second charge mortgage, is a loan secured against the equity you have in your property. This basically means that you would have two mortgages. There are a few benefits to getting a secured loan over a standard mortgage. Firstly, you won’t be changing the terms of your existing mortgage. If your credit isn’t as good as it used to be, you may want to keep your more favourable mortgage terms. As well as this, by taking out a second charge loan, you wouldn’t have to pay any early repayment charges, as you would be keeping your original mortgage.
In addition, second charge loans for buy to lets may be easier to secure if your circumstances aren’t ideal. Examples of this could be poor credit or income issues.
By taking out a buy to let secured loan you are more likely to be able to borrow more than with unsecured personal loans, which are capped at £25,000.
BTL secured loans are also very flexible, and can be taken out for a wide variety of uses. The most common use is by landlords to raise funds and buy another property to build their portfolio. However, they are also a quick and easy way to quickly gain funds to take advantage of sudden investment opportunities.
They can even be used for your personal life. Examples include paying for weddings, holidays, or to make home improvements. This is all possible so long as you meet the lenders criteria.
Remember, if you own your own home, you could take a secured loan against this to use to develop your buy to let portfolio. There is more choice with a personal secured loan and the rates are cheaper
Secured Buy to Let Overdraft
A new product which BTL landlords and brokers are excited about is a BTL overdraft which can be secured against multiple property’s. This creates a facility landlords can use when needed and they only pay interest on the balance outstanding at the time.
Its more flexible and cheaper than bridging and can be secured by a first, second or third charge on BTL and residential property up to 75% loan to value.
Can you get one
To apply for a BTL secured loan, you very simply have to own a property, and have sufficient equity and income. If your situation allows it you could even get third charge loans on top of this.
Your ability to get the loan depends on a few factors. These include you income, expenditure, equity available and your credit history. Even though the lender will be lending the amount secured against your property, you will still have to prove you income and expenditure. It’s worth pointing out that the equity will not be representative of the value of you property. If you have a mortgage of 60%, then the secured loan will be on the 40% of the property that you already own.
The maximum loan to value most lenders will consider is usually around 75% secured against a BTL, but can go up to 85% with the right circumstances. However, in some cases it is possible to get 100% LTV ratios from lenders especially when securing against your main residence.
The rates of second charge BTLs can be favourable, especially when compared with unsecured loans. But the rate you are offered will depend on your situation. Lower risk investments will get better rates. Examples of this include lower LTV ratios, and borrowers with good credit histories. To find out your rates, contact Promise Money.
First Time Buyer Buy to Let
First time buyer BTLs are not very common, however, it is possible to find them. As you are a first time buyer, you will have fewer mortgage providers willing to lend to you. But Promise Money can help you find a lender that will help you. Each lender has different criteria, but they follow the same general rules. You will need a larger deposit than experienced landlords, generally the minimum is about 25%. You will also need to prove that you have sufficient income, and that you can afford it in general. What you do for work is also an important factor, with some professions being seen as lower risk. Your credit rating will also affect what mortgage you can get, as well as your age. If you already own your own home it will help considerably.
As with most BTLs, a large number of first time buyer BTLs are interest only. This means that you will have to ensure you can pay back the mortgage at the end of the term. It is possible to get repayment mortgages. If this is better for you, talk to our advisors today.
In order to get a first time buyer BTL you will have to provide information and documents. These include a reference from your landlord if you’re renting, multiple wage slips, a history of past addresses and up to 6 months of bank statements. After all of this, you may be subject to tougher stress tests as described before, so it may be harder to prove profitability.
The is a subtle difference between BTL Landlords and property investors. Most property investors rent their houses out but they also buy property to improve it and sell at a profit.
This is a decision taken either before purchasing or often during the refurbishment process. However anyone with the intention of buying, to then sell in a short space of time, may need to consider a different range of products as the property may never be tenanted during their ownership.
What ever the intention, often their is a requirement for short term finance to buy the property or refurbish it before selling or remortgaging on a Buy to Let basis.
There are numerous products available, in addition to those above, which property investors might use. Talk to a Promise money specialist to find out which is best for you.