How to Buy An Investment PropertyHi if we haven’t met before, my name is Dan, I am a CeMAP qualified mortgage & protection adviser. This video is purely for educational purposes only, and should not be seen as advice or a recommendation to act and I must stress your PROPERTY (replaced home as non-reg) may be repossessed if you do not keep up with the repayments on the mortgage.
Before I get started, I must stress some mortgages on investment properties are regulated by the FCA, and this video is purely based on buy to let mortgages that are not regulated by FCA. Please seek professional advice before applying for a Buy to Let mortgage on an investment property.
What is a Buy to Let Mortgage?This is where you purchase a property that you will rent out to somebody else.
It is a specific type of mortgage to purchase the property that allows you to buy property as an investment.
You then let out the property and act as the landlord for the people who rent it. You charge them rental payments to cover the mortgage and your other costs.
Who can get a Buy to Let mortgage?Each lender has different requirements for buy to let mortgages but they will only accept your mortgage application if they think you can afford it.
They will base this on:
How much rental income they expect you will get from the property and your financial circumstances.
These are the 2 main factors they’ll assess to decide how much they will be willing to lend to you.
Lenders will look at how much rental income you will get from your property and compare this to the monthly repayments you would have to pay on the mortgage.
The rental income will usually need to be at least 125% of your mortgage repayment. This means it would need to cover the full mortgage payment plus another 25%.
For example, if your mortgage repayments came to £400, you would need to be able to charge at least £500 rent each month.
They will ask you to confirm the annual rental yield and check with a local surveyor that you are likely to get this much by looking at how much similar properties in the area charge.
Lenders will also decide if you can afford the mortgage by looking at how much the repayments will be and your credit record. If you would like to know how to carry out a credit search on yourself for free, watch this video.
Many lenders only accept you if you earn more than their minimum income requirement, which is typically around £25,000 a year. This is to make sure you’re able to afford to pay the mortgage if your tenant doesn’t.
Lenders will also often check what you spend and what you already owe on the mortgage on your own home, loans, and credit cards for this very reason.
Buy to Let Mortgage vs Residential MortgageBuy-to-let mortgages are a lot like ordinary residential mortgages, but with some key differences:
The fees tend to be much higher.
Interest rates on buy-to-let mortgages are usually higher.
The minimum deposit for a buy-to-let mortgage is usually 25% of the property’s value, although it can vary between 20-40%.
Most BTL mortgages are interest-only. This means you pay the interest each month, but not the capital amount. At the end of the mortgage term, you repay the original loan in full.
BTL mortgages are also available on a repayment basis.
Most BTL mortgage lending is not regulated by the Financial Conduct Authority. There are exceptions, for example, if you wish to let the property to a close family member. These are often referred to as a consumer buy to let mortgage and are assessed according to the same strict affordability rules as a residential mortgage and I strongly recommend you seek professional advice surrounding this.
How much can you borrow on a Buy to Let Mortgage?The maximum you can borrow is linked to the amount of rental income you expect to receive. There is also a facility called top-slicing if the rental income falls slightly short.
Lenders typically need the rental income to be 25–30% higher than your mortgage payment.
To find out what your rent might be, talk to local letting agents, or check the local newspapers to find out how much similar properties are rented for.
Where can I get a Buy to Let Mortgage?Most of the big banks and some specialist lenders offer BTL mortgages.
It’s a good idea to talk to a mortgage adviser, such as myself before you take out a buy-to-let mortgage, as they will help you choose the most suitable deal for you.
Soooooo, things to remember
It is important to do some research into the type of product and features you need before making a purchase or changing mortgage lender. Don’t just look at the headline rates offered on the mortgage. There are often other fees and charges involved.
Make sure you’ve planned for the future. You shouldn’t assume your property will always have tenants.
There will almost certainly be periods when the property is unoccupied or rent isn’t paid and you’ll need to have a financial cushion to meet your mortgage payments.
When you do have rent coming in, use some of it to top up your savings account for this reason.
You might also need savings for major repair bills. For example, the boiler might break down, or there might be a blocked drain.
Please don’t fall into the trap of assuming you’ll be able to sell the property to repay the mortgage. If house prices fall, you might not be able to sell for as much as you had hoped.
If this happens, you’ll be left to make up the difference on the mortgage.
You must also remember to declare your buy to let properties at the end of each financial tax year. Mortgage lenders and the HMRC are coming down hard on non-disclosure, as a buy to let property is classed as a form of income in most instances.
I am not a qualified tax adviser, so I can’t speak about this in great detail but there is likely to be income tax and capital gains tax that will need to be paid at points throughout the property ownership and sale of the property, so please speak to a tax adviser about this.
This probably sounds all quite daunting and like there is a lot involved, hopefully, that isn’t the case but if it is, please feel free to contact me and ask as many questions as you like.
Remember, your property may be repossessed if you do not keep up repayments on your repayment mortgage, equity loan, or other loans secured against it.
If you’ve found my content helpful, and you wish to buy me a coffee, I have put a link in the description below. But even more importantly, if you need help, please contact me!
If you’ve ever wondered what are the different types of rates, I’ve made a video about it here.
See you next week.