If you are keen to become a property investor, sooner or later you will be looking at obtaining a buy to let mortgage. In this case, you will need to find out as much as possible about this type of loan.
First of all, what is a buy to let mortgage?
A buy to let mortgage (sometimes called a property investment mortgage) is a loan secured on a property which you are purchasing purely for the purpose of deriving an income from it – not to live in. This type of mortgage has only been around since the early 1990s – that was when mortgage lenders began to realise that there was a growing interest in this type of investment by ordinary people. Because this type of purchase is seen by lenders as carrying a greater risk, they impose different conditions than they would on an ordinary residential mortgage.
It’s important therefore when you apply for your mortgage that you make it clear you are not buying the property to live in yourself. If you don’t, you could find yourself in trouble. The main requirements imposed by buy to let lenders include:
- A deposit of at least 15-20 per cent.
- The achievable rental yield must be around 130% of the mortgage repayments – some require it to be 150%.
- In addition, some require the annual yield to be at least 8% of the mortgage amount.
For example, suppose you found a property as a potential buy to let costing £200,000. You would probably require a deposit of 20% which is £40,000, so the mortgage you would apply for would be £160,000. At 6%, interest only, this would require a monthly payment of £800. The lender would therefore need to see an achievable rental yield of £1,040 per month (at 130%) before agreeing to grant you the mortgage. This would usually be calculated by the surveyor on the basis of comparable rental properties in the neighbourhood.
Remember that, for most lenders, your own income or financial circumstances is not the first consideration when it comes to buy to let mortgages – in fact, many don’t look at your income at all.
The reason the lenders impose these requirements is not only to make sure you can afford your mortgage payments, but to ensure you have a hedge against other factors that will affect your profits, including:
- Void periods (when you have no tenant);
- Letting agency fees;
- Maintenance and repairs;
- Insurance payments.
Of course, once you have allowed for all these things, you still need to make a profit. If you don’t make any profit, there is really not much point in doing all this in the first place!
The lender won’t be concerned about this so it is up to you to factor this into your calculations – BEFORE committing yourself to the mortgage. If there is any doubt as to whether there is enough demand in the area to command this level of rent, better be safe than sorry. Pull out and try another area.
Remember that getting a buy to let mortgage is first and foremost a business proposition, not an adventure. Be hard-headed, do your calculations, and take advice from a specialist buy to let broker. Then you stand a good chance of opening up a successful business.