What every property investor needs to know about buy-to-let mortgages
When looking to benefit from gearing on your property investment, you’ll want to find the best buy-to-let mortgage possible. To do this, you’ll need to research the buy-to-let mortgage market and prepare your finances beforehand.
How are buy-to-let mortgages different to normal mortgages?
When you buy your own home, the mortgage lender is lending against the value of the property. The lender will be pretty confident that you will live in the home for a long time, and so its main concern is that you have the income to make good on the mortgage payments.
When offering a buy-to-let mortgage, a lender doesn’t have the same level of security: your income from work is needed elsewhere, to pay the mortgage on your home, for example. Here are the main ways in which a buy-to-let mortgage differs from homebuyer mortgages:
- Borrowing capability is based upon rental income
The first thing to understand is that the buy-to-let mortgage lender will look at the rental income potential when deciding if it is prudent to lend money to a property investor. It will want to know that rental income is more than sufficient to cover the buy-to-let mortgage payments.
Though different lenders have different criteria for this, generally speaking, you’ll need to show that the rent you receive will be around 25% higher than the mortgage payments. This helps the lender allow for void periods and other costs of life during your property investment, such as property management fees.
If your rental income is £1,000 per month, this will support a buy-to-let mortgage with monthly payments of around £800.
Lenders are also now required to consider other things such as your debts, and other factors affecting your ability to pay the mortgage. This is the area of most change in the past few years.
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- The deposit needed is higher
The minimum deposit you’ll need to make is higher than the deposit you need when buying your own home, too. If you’re a young property investor, you might be able to get a loan from the bank of Mum and Dad for your investment property or otherwise put in place a budget to save an investment property deposit.
Generally speaking, most buy-to-let mortgage lenders require a deposit of at least 25%, though it’s worth shopping around because some will accept less.
- Fees are higher
The arrangement fees are higher for a buy-to-let mortgage, and while these can be offset against tax, you should still be prepared for them.
How to get the best buy-to-let mortgage
Getting the best buy-to-let mortgage isn’t simply a question of searching on mortgage comparison websites. Do your research, find the best buy-to-let mortgage lender for you, and then prepare to show that you are a responsible property investor.
Here are my five tips on how to secure the best buy-to-let mortgage offer available:
- Make sure you have a good credit score before you apply, too many applications will affect your credit.
- Get together the evidence that you have the deposit saved in one account and ideally it's been there for at least 3 months. If you are borrowing from the Bank of Mum or Dad or anyone then the lender will what to know how you will pay that back, if it's a gift then get a signed statement confirming it's a gift otherwise they will class it as debt which could affect the application.
- Get your proof of income together and be prepared to show this. Make sure that it shows as much basic wage as possible, commission can change, bonuses can be discounted so the ideal is to show a consistent provable level of income.
- Check the Electoral role and make sure address is on it. Lenders will want at least 3-5 years of proof of address, espcially if you have just moved. If you're not on the electoral role then make the changes otherwise you might find your application is declined before it's even started.
- Ensure that your bank account (at least the last 3 months of it) is clean of overdraft fees, betting account transfers, debt repayments (that you didn't disclose) and anything that may look affect your application. If its going out of our account or coming into your account and it hasn't been disclosed then either be prepared to explain it or look to clear it before applying.
Have you been refused a buy-to-let mortgage? Did you know that some buy-to-let mortgage lenders are better than others, and some should be avoided altogether.
Chat with the team on +44 (0)207 923 6100 today and we’ll help you with strategies to guarantee you get a great buy-to-let mortgage offer.