Buy To Let Explained
A Buy to Let (BTL) mortgage is for a property you are buying with the sole intention of renting it out.
A BTL mortgage is very similar to a residential mortgage, the main differences are that you generally need a minimum deposit of 25% of the property value in order for a lender to accept you onto a BTL mortgage. Experienced landlords may be able to reduce the deposit to 20%. Another way they can differ is that many BTL mortgages are interest only mortgages, although there are repayment options available – it depends on your circumstances.
The biggest difference is the amount you can borrow is based not on your earnings but on the rental the property can achieve. Buy to Let lenders usually calculate how much you can borrow based on the following, rent received must cover the mortgage payment by 145% at a notional rate of 5.5% so for example:
Loan £100,000 rent required would be £100,000 x5.5% x145% divided by 12 = £664 a month rent required. However this is purely a guide not all lenders use this as it depends on your individual circumstances . A few lenders will also allow any part of your income not already used for residential mortgage needs to support the BTL if the rental alone would not cover it.
Also business/investment BTL mortgages are not regulated by the financial conduct authority (FCA). The exception to this being consumer BTL’s*
*The Treasury has defined consumer buy to let as ‘a buy-to-let mortgage contract which is not entered into by the borrower wholly or predominantly for the purposes of a business carried on, or intended to be carried on, by the borrower.’
There are some situations where borrowers do not seem to be acting in a business capacity. Examples of this may be where the property has been inherited or where a borrower has previously lived in a property, but is unable to sell it so resorts to a buy to let arrangement or they are buying the property with the intention of letting it to a family member .
You might be considering a BTL mortgage if:
- You want to invest in property
- You can afford to take the risk
- You already own your own home (first time buyers are not usually acceptable for BTL mortgages)
- You have a good credit record
- You normally need to earn £25,000+ a year
If you are reading this and thinking that maybe a BTL property is for you but want to discuss your options then please don’t hesitate to get in contact with us.
In addition, make sure you check out our next blog on tips to help you with your search!