Buy To Let

Buy To Let Fundamentals

Buy to Let: Income and Capital appreciation

A buy to let mortgage enables you to buy a property for investment purposes. Typically, the investment strategy of BTL investors is to achieve two objectives:

Income generation: The property is rented out with rental income sufficiently covering monthly mortgage cost. As such, the excess is additional income. For example:

Purchase price of a property is £180,000.

Typical rent for property in the area is £1000 per month.

You obtain a BTL mortgage of £126,000. (70% LTV).

You secure a BTL 2 year fixed rate mortgage of 2.64%.

BTL mortgages are generally arranged on an interest only basis.

Monthly cost on interest only is: £278.

Rental income from property is £1000 – £278 = £722 (before applicable taxes).

Capital appreciation: For the property to appreciate in value over the term of the mortgage, therefore when you eventually sell you’ll pay off your mortgage and be left with a nice lump sum to spend as you wish: pension, re-invest, pay off your residential mortgage, relocate abroad, etc. For example:

Purchase price of a property is £180,000.

You buy in an area that has potential for capital growth.

Date of purchase: May 2014

You obtain a BTL mortgage is £126,000. (70% LTV).

Term of mortgage: 25 years

BTL mortgages are generally arranged on an interest only basis.

Expiry date: April 2039

Question: In 2039, what will be the value of a property bought in 2014?

Answer: 100% increase = £360,000?

Capital gain is £360,000 – £180,000 = £180,000 (before applicable taxes)

Income and capital appreciation is why many people invest in property.

General eligibility for Buy to Let Mortgages

An income of at least £25,000 per annum

A home-owner with or without a mortgage

You must have a deposit of at least 25%

Monthly rental income must sufficiently cover the interest only mortgage balance by 125% using a notional rate of 5%. For example:

Purchase price is £180,000

Mortgage of £126,000 (70% LTV)

The lender will expect the rent to be at least £656.25 per month

The calculation: £126,000 x 5% = £6300

£6300 per annum /12 months = £525 x 1.25% = £656.25

If the surveyor confirms that rental income is at least this figure, then the lender will offer you a mortgage for £126,000. However, if the surveyor confirms that the rent is actually £600, then the lender will reduce the mortgage accordingly, i.e., £115,200. As such, you will need to put down a larger deposit (£64,800).

General BTL principles

Product arrangement fees are higher than residential mortgages and can vary from £999 to 3% of the loan amount. Your broker will source the best rates, taking into consideration all the fees.

All lenders allow you to do interest only and they accept the sale of property as an acceptable repayment vehicle. In fact, it’s assumed that you’ll be doing interest only, but if for some reason you want capital and interest, then it is available.

The maximum mortgage term is generally up to age 75, with a few lenders extending to age 85. For example, you could be age 54 and take out a 20 year BTL mortgage.

Property cannot be rented out to family members. If so, you need a regulated BTL lender.

There are a few lenders that do not have a minimum income requirement; conversely, some lenders have higher income thresholds if it’s a large loan. In addition, some use higher rental calculations.

All lenders look at your overall mortgage indebtedness and as a result may decline to lend if you have a large property portfolio. For example, if you have three or more BTL properties, some lenders will say you are maxed out and decline to lend.

The surveyor must confirm to the lender that the property you are looking to buy is habitable and available to rent out immediately.

Properties must be rented out on an Assured Shorthold Tenancy (AST) and lenders prefer that the property is rented out to a single family unit on one tenancy agreement, as opposed to multiple occupants on separate tenancy agreements.

Household of Multiple Occupation (HMOs): The majority of lenders will not lend on HMO properties. But there are a few lenders that are HMO friendly.

There are a few lenders that will consider lending to first time buyers. As such, you don’t have to be a home owner. For example, you could be living with your parents but you want to buy a property before prices spiral out of control. As such, you buy your first property and rent it out.

You will have access to the widest choice of products when borrowing at no more than  70% LTV. There are a few lenders that will go up to 80%.

Lenders are rather fussy on property types and some do not lend on flats while others will decline to lend on x local authority flats or flats above four floors, flats above commercial premises, or high rises unless they are in prime locations. And in relation to new build flats, the majority will restrict the LTV to 65% to 70%.

The mortgage must be in your sole or joint names. But a few will allow limited company purchases and the directors have to provide personal guarantees.

There are some products that can only be accessed via independent mortgage brokers. If you want access to the widest choice of products, your best approaching a specialist BTL mortgage broker.

Mortgageintellectual.com is not recommending that you invest in any specific property. You must conduct your own due diligence before investing in property or a crowdfunding platform. Property prices can rise and fall in value and past performance of the UK property market is no guarantee to future performance.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

The Financial Conduct Authority does not regulate most types of buy to let mortgages, bridging loans, development loans and commercial loans.