I’ve said it before and I’ll say it again (until I’m blue(r) in the face), a mortgage can ultimately determine the success or failure of any property investment.
Mortgages are probably the single most important aspect of both buying and maintaining a property’s finances, yet so many landlords fail to understand how they truly work.
Poor mortgages choices sink ships.
What is a Buy-to-let mortgage?
A BTL mortgage is a loan to help buyers purchase a property specifically for letting.
They work exactly like regular residential mortgages: borrowers repay the loan amount with interest over an agreed period of time.
In practical terms, the only difference you may notice while shopping around for a BTL mortgage, is that they generally have a higher interest rate than residential mortgages.
That’s really it.
Buy-to-let mortgages are extremely competitive – where should you get yours?
Regardless of what type of mortgage you’re after, the market as a whole is extremely competitive.
Rates change every day and new products are released into the market regularly, so it’s important to shop around for the best deals right up until you sign on the dotted line.
It’s important to remember that even a puny 0.1% difference in rate can save/cost you thousands of pounds over the period of a mortgage (because you’re generally dealing with large sums of money with mortgages). So pay attention to every last fraction of a percent, regardless of how minuscule they may look as a numeric value.
I personally don’t recommend any one place to look for your BTL mortgage – you’ll miss out on good deals by limiting yourself (even if you’ve been given a recommendation by your nan).
I recommend looking through as many places as possible, including the following places:
- Online BTL mortgage brokers (e.g. Habito is a free online BTL mortgage broker, who currently has terribly good ratings on TrustPilot from 2000+ borrowers)
- Local high-street banks and building societies
- Local independent brokers
- Mortgage comparison websites like MoneySuperMarket.com
What’s the difference between a residential mortgage and a buy-to-let mortgage?
I already briefly mentioned how BTL mortgages are generally more expensive, but there are also a few other differences which are worth mentioning:
1) Lenders see BTL mortgages as higher risk than residential mortgages, so that’s why you should expect buy-to-let mortgages to come with higher interest rates, product fees, not to mention a requirement for a bigger deposit. Before deciding on a loan, make sure that any high product fee being paid is worth it, as many cost so much that a higher interest rate would be a better bet.
2) Secondly (and most obviously), the policies are different. Buy-to-let mortgages have specific terms and conditions for properties that are being let.
3) Thirdly, when applying for a buy-to-let mortgage, some lenders may take into account the rent you will earn from the property as a basis of your loan. In fact, back in the day, most BTL lenders used rental income as the primary basis of the loan. However, since the recession back in 2007, fewer lenders take the rental income into consideration.
Do I need a BTL mortgage to let my property?
Yup, you do.
Although, a lot of landlords do illegitimately – often with the acknowledgement of their snake-oil broker – let their properties while on a residential mortgage, and without notifying their lender.
However, in my humble opinion, it’s not worth the risk as the potential penalties drastically outweigh the alternatives.
Specifically, having the incorrect mortgage would most likely invalidate your landlord insurance, which means that in the event of an emergency (e.g. property burns down), you would not be covered. Most insurers cover themselves by stating in the terms of the policy that the policyholder has the lenders permission to let.
Needless to say, insurers wouldn’t think twice about using that as a reason to invalidate any potential claims.
What would happen if I get caught renting my property on a residential mortgage?
It depends on the lender, but using a residential mortgage For a BTL probablly constitutes as “mortgage fraud”
As a consequence, the lender could do the following:
- Revoke your loan and ask for immediate redemption of the mortgage
- Automatically change your rates to a higher amount that reflects their current Buy-to-let products
- Enforce financial penalties
Either way, nothing pleasant would come of it.
There’s usually more details on your lender’s rights in the event of breaking their terms and conditions.
I want to let my current residential house, do I need to remortgage?
It’s common for people to buy a second home, while letting out their first property. In this case, you should inform your lender that you wish to let your property.
In many instances, it will just be a straightforward case of updating the policy, which your existing lender can assist with.
Most lenders will charge an admin fee to do so, and maybe even put you onto a new rate, but you shouldn’t need to remortgage with a new lender (unless you want to).
Either way, it’s imperative to inform your current lender that you will be letting your property.
Some lenders may not allow you to let your property with any of their mortgage products. If that’s the case, you’ll have no choice but to remortgage. But you will also need to check to see if you’re tied into your current policy, and if so, check whether there are any penalties for an early exist (there usually is one).
How easy is it to get a BTL mortgage? Will I qualify?
Short (and annoying) answer: it depends.
While I won’t be able to give you a definitive answer, obviously, perhaps I can provide some clarity on expectations.
You know how old people always reminisce about the olden days, and insist it was a different world (often for the better)?
Well, I’m going to make one of those rash statements.
When I first became a landlord back in mid 2000, getting a BTL mortgage was a piece of cake, because by and large, the majority of lenders used the potential rental income (of the property being purchased) as their primary basis of approving a mortgage, and the deposit required was minimal.
Essentially, the rental income determined how much you could borrow. No, they didn’t really look into your personal salary/income.
It was that EASY back then.
Unfortunately, around the same time (mid 2000), a bunch of stupid bankers were dishing out stupid subprime mortgage deals to equally as stupid borrowers, which eventually lead to a housing crash.
That was the end of that.
Since then, qualifying for a mortgage in general has become increasingly more difficult. From my recent experiences of mortgaging and remortgaging, lenders don’t give a flying-crap about rental income anymore. They don’t even take it into consideration.
Qualifying for a BTL mortgage is similar to qualifying for a residential mortgage these days, which means your personal income (excluding rental income)/salary and credit rating is really all that matters.
Will you qualify? Probably, but how much you can borrow will vary from lender to lender, and it will most likely be based on your personal net income, and being able to prove a steady income!
Lenders are much more stringent with their prerequisites these days, and most of them assess “affordability” i.e. they will look into your incomings/outgoings and determine whether or not you can actually afford the rent in event of disasters like rent arrears.
As for deposits, long gone are the 90% – 100% mortgages.
For a good rate, you’ll need a 40% deposit. For a “grit your teeth and bear with it” rate, you’ll need a 25% deposit.
At the very least, you’ll need about a 20% deposit to obtain a mortgage deal that won’t want to make you blow your brains out, but even with such a little deposit, you’ll be very limited to the products available to you.
If you find a deal that requires a lower deposit than 20% (which is unheard of these days), rub your eyes to check it isn’t poor vision playing games with you. If it’s genuine, you’ll probably have to sell your soul, kidney and left leg, and bear an astronomical interest rate to get on board.
BTL mortgages – nope – they ain’t no joke! Anymore.