Financing a buy to let property
June 5, 2018
Let’s look at financing a buy to let investment.
If you are buying outright for cash, then you will be in a very strong position to negotiate a good deal on a property because you are not relying on a mortgage and you are not in any kind of chain. This means that you can act quickly which is very attractive to sellers who are looking to complete on a property sale within a shorter time frame than the typical 3 to 6 months.
Be sure to state your position and use that to negotiate a good deal. Most experts agree that you make money when you buy a property by locking in equity from the outset. Buying at a discount also de-risks an investment, so it is well worth leveraging your cash buyer position to the maximum advantage to secure a good deal.
If you are putting down a deposit - which is now typically 30 to 40% for buy to let - then you will need to source a mortgage to make up the difference.
Speaking to a reputable mortgage broker at this early stage is very important.
Having the finance in place is everything in property - it is the lifeblood of transacting - so it’s very important to understand that you can access buy to let mortgages with your individual circumstances.
Some people will often just go to their bank and ask about in-house mortgage products, but we recommend speaking to a mortgage broker who is “whole of market” as they will have access to a much wider range of products, including those from specialist BTL lenders who have much more competitive products than the High Street banks.
A mortgage broker will take you through a detailed “fact find” to ascertain your credit worthiness and determine which products you can access.
You can secure what is known as a “decision in principle” from a lender which is a preliminary agreement that you have met their criteria for lending. This is important for when you come to put in offers, as the vendor will want to know how you intend to finance the purchase and if you have everything in place to move forward.
Securing a buy to let mortgage is fairly straight forward as the lending is based more on what rental the property will achieve in income, than it is on the borrower.
Typically, you will need a minimum salary of £25K, a clean credit rating, and have been on the Electoral roll at your current address for 3 or more years.
Last year, stricter affordability criteria was introduced for buy to let, and, as a result loan to values declined.
Most lenders now use the following calculation to determine how much they will lend:
Monthly rent x 12 divided by 5.5% divided by 145%.
So, for example, if you were buying a property for £200K with £1000 pcm rent, the maximum loan the lender would agree to is £150,470.00. This means you would have to put in a deposit of circa £50K.
The above calculation is a very useful way to assess a deal as a high yielding property will likely mean that you will need to put in less of a deposit.
The next choice you will need to make is whether to go for a fixed rate or variable rate mortgage.
With the looming threat of base rate rises (at the time of writing), many landlords are opting for a fixed rate mortgage. There are some very attractive 2, 5, and even 7 year fixed rates around at the moment, so, if you are looking for certainty and peace of mind, a 5 year-plus fixed rate would be a sensible option.
Again, you can discuss this with your mortgage broker to find the product that is right for you, your property, and your goals for the property.
You will also need to decide whether you are going to apply for an interest-only or repayment mortgage.
Most buy to let landlords favour the interest-only option as the monthly net cash flow will be greater than if you have a repayment element to the mortgage.
Furthermore, the way the repayment is calculated, for the first third of the mortgage term, only the interest is being paid off, so the capital element is not being bitten in to for many years.
Most interest only mortgages come with an option to pay off some of the capital in a lump sum - usually up to 10% of the outstanding balance in one year - so this does provide flexibility if you do wish to pay down your BTL mortgage.
It is important to understand that an interest-only mortgage means you are not paying off any of the capital. So, at the end of the mortgage term in typically 20 years, you will still owe the lender the original amount.
It is therefore vital to have a plan about how you will repay the debt at the end of the term.
1. Selling the property
2. Taking out a mortgage with a new lender to redeem the original one.
3. Having another vehicle in place, such as an inheritance or sale of a business or the sale of another property, that will provide the necessary funds.
Most landlords use buy to let mortgages as it enables them to leverage their monies to the maximum and invest in multiple properties, rather than buying one property outright for cash.
The decision you make in this regards will depend on your personal circumstances, your tax position, and your attitude to risk, amongst other things. Your broker can advise you on all these issues and help you to make the right choice.
A buy to let lender will typically need to see:
1. Evidence of your income
2. Copies of your bank statements
3. Evidence of your identity and the address where you reside, including being on the electoral role.
4. If you are self-employed, the lender will need your last three year’s accounts.
There will be additional documents that a lender will ask for, depending on your circumstances.
You will also be required to pay for a valuation of the property. This is for the benefit of the lender to check the security.
The lender will lend on the purchase price or the market value, whichever is the LOWER, so if your property is down-valued by the surveyor, you can still go ahead with the purchase, but you will have to make up the difference by increasing the deposit.
If you are buying a new build property, the likeliness of down-valuation occurring will be diminished, as the developer will undoubtedly be able to show the valuer “sold comparables” of other similar properties in the development.
There will also be a fee for the mortgage which can be added to the loan, and your broker will also likely charge a fee, so make sure you understand all the fees that are being incurred for the acquisition.
When the sale is agreed, the legal process will start and, when the time comes to complete, your solicitor will contact your lender and arrange to draw down the money on the completion date.
You will be required to transfer the deposit, the stamp duty payment, and any other searches and legal fees payments to your solicitor.
On the day of completion, you will receive a completion statement showing all the fees that have been incurred in buying the property.
We recommend that you make up a file for the property and keep all the paperwork that is associated with it in one place. You will need this information for many purposes, including your tax return.
A reputable broker and solicitor will assist you through this process and make it as seamless and stress-free as possible, so it’s worth taking a bit of time to find the write team to work with, as they will be on your property journey with you, should you wish to continue to build a portfolio.