Wherever you are in your property investment journey, regardless of your experience level, it’s essential to understand these buy to let mortgage basics. In this blog, we answer the most common questions we hear from landlords to help you get started.
Whether you’re new to buy to let or a seasoned portfolio landlord looking to refresh your knowledge, it’s always good to go back to basics to ensure you understand the fundamentals of buy to let. Below, we answer the most common questions about buy to let mortgages to give you the confidence you need in your property investment decisions.
Are buy to let mortgages regulated?
The Financial Conduct Authority (FCA) does not regulate all buy to let mortgages, as they are considered business transactions and are therefore ineligible for the FCA’s consumer regulations. Some buy to let mortgages will be regulated, however, such as consumer buy to lets, so it can depend based on your individual circumstances.
Can I live in my property with a buy to let mortgage?
Properties with a buy to let mortgage are designed to be let out to tenants rather than the property owner, so you can’t live in it. Doing so will likely mean you are in breach of your mortgage terms and conditions, which can lead to legal trouble, such as fines and penalties as a minimum. Speak to one of our brokers to discuss your mortgage terms and see what types of homebuyer rates you could access if you want to move into one of your current investment properties.
What are rental yields?
Rental yields are calculated to demonstrate how much income, as a percentage, your buy to let property will make you. Rental yield calculations are:
Annual Rental Income divided by Property Value multiplied by 100
As a rule, the more complex the property type, the higher the rental yield. Vanilla buy to let properties typically generate average yields of around 5-6%.
What is interest cover ratio?
Interest cover ratio (ICR) is how lenders assess whether a specific mortgage product is affordable to you. These calculations are often referred to as ‘stress testing’.
If you’re investing in your personal name, you’ll typically be stress-tested at 145% at payrate (the mortgage rate) on a typical 5-year fixed rate product. For Limited Companies, you can expect an affordability assessment at 125% at payrate. Depending on your tax code, you lender may stress test you at 125%.
As Limited Companies pay corporation tax rather than income tax, lenders usually offer a more generous affordability calculation, as borrowers will most likely pay less tax on the rental income, and thus have more money left over to cover their mortgage payments. This tax benefit is why many landlords choose to invest via a Limited Company. Please speak to a professional tax advisor before making any property investment decisions if you’re considering investing via a Limited Company.
Can I get a mortgage on a buy to let property with a sitting tenant?
Yes. There are several benefits of purchasing a property with a tenant in situ, and it can make the process much easier for you:
- You save time and money by not having to search for a tenant yourself
- You receive guaranteed rental income from day one until the tenancy agreement ends
- The tenant vetting process has been done for you, and you can speak with the current landlord about the tenants’ payment history
- Gas, boiler, and electrical safety certificates should be in place, which means less admin work for you to complete!
On the other hand, some lenders may be wary. Purchasing a property with a sitting tenant restricts what you can do with the property. If you want to refurbish the property, for example, it can be difficult to get this done before the existing tenancy ends, and you will also have to honour the tenant’s current monthly rental costs.
To see what rate options may be available to you, get in touch here.
What costs are involved when taking out a buy to let mortgage?
There are some fees to be aware of when taking out a buy to let mortgage. These will vary depending on your individual circumstances, whether it’s a purchase or remortgage transaction, the mortgage product itself, and the lender. Buy to let mortgage fees may include the following:
- Stamp Duty Land Tax for Second Homes
- Legal Fees
- Valuation Fees
- Lender Arrangement Fees
Some lenders offer incentives such as cashback, free legals, and free valuations. Many lenders also offer products with no arrangement fee at a higher interest rate to try and attract new borrowers. Our brokers will review all your options to find you the most cost-effective deal.
Need to move quickly with your mortgage? You may also find our blog 9 Top Tips to Speed Up Your Mortgage Application useful.
What next?
Are you looking to secure a buy to let mortgage? Head over to our easy-to-use buy to let mortgage calculator to compare rates or get in touch with one of our BTL mortgage brokers.
