Getting a buy to let mortgage or raising finance for property investments more generally is an area that is constantly changing. Over the last few years, things have changed so much it has been something of a roller coaster and in the years to come the pace of change shows no sign of slowing down. Today, Matthew Naylor from Ascot Mortgages has kindly agreed to give us the low-down on where buy-to-let mortgages are today.
Buy To Let Mortgages
By Matthew Naylor
- Your Credit Rating
- 2 Points On BTL Mortgage Eligibility
- How Much Can You Borrow?
- Rental Protection Insurance
- Interest Only Mortgages
- General Advice
- Summing Up
Your Credit Rating
A clean credit file is key. There is less flexibility for lenders to look at a buy to let mortgage if the applicant has adverse credit than there is if it were a residential purchase.
Some small historical issues like a missed payment on a credit card or store card may be fine, however, defaults, County Court Judgments (CCJs) and missed mortgage payments may pose you a serious problem.
It is also advisable to steer clear of payday loans. Lenders do not like this kind of finance as they suggest the client is not managing their money well or has a low reserve of funds available if some worst-case-scenario were to befall them.
2 Points On BTL Mortgage Eligibility
1. Minimum Income
To be able to have the majority of the BTL lenders to choose from, a minimum income of £25k will be required.
There are lenders that will work with those with a lower income, and some have no minimum income requirements whatsoever, but a £25k income will ensure the majority of the market is available.
2. How Many Properties You Already Own
The number of mortgaged buy-to-let properties you own can have an impact on which lenders will be able to lend to you. For instance at the time of writing (early 2014) Skipton Building Society will not consider an application from a landlord that already has ten buy to let mortgages.
This number will differ from lender to lender, so the best thing to do is to speak with an experienced mortgage broker for advice.
How Much Can You Borrow?
When it comes to BTL mortgages, the amount you can borrow is connected to rental return. In other words, how much you can borrow depends on how much the lender thinks you are going to earn.
How Do Lenders Determine What The Rental Income Is Going To Be?
So, the question is: Do you, as the borrower, need to prove what your rental return is likely to be, based on market comparisons? Or, will the lender do their own research into the market, to determine likely or typical rent?
The way it works is this:
In most cases, lenders work on a calculation of the amount being borrowed at a fixed rate of interest (5% normally, regardless of the actual interest rate of the product) to work out the monthly payment, they then ‘x’ this by 125% (in most cases) and the rent needs to be above that figure.
An Example Calculation
- £75,000 loan at 5% Interest,
- Means per month = £312.50
- This is then ‘x’ 125% = £391
So, in this example, the monthly rent would need to be at least £391 to be able to borrow 75k and the lender would have to be satisfied that such an amount could be as close to guaranteed as possible.
Rental Protection Insurance
Qualifying for a BTL mortgage will require buy to let building insurance. Normally, this will be the only insurance that you will absolutely need to have.
So, rental protection insurance is not a necessity but it is advisable to have it.
Interest Only Mortgages
Interest only mortgages are widely available from all buy to let lenders.
As an investor, you should always maintain a sense of detachment from any potential buy to let property. You’re not buying it to live in, you’re buying it as an investment. But, it’s a cash-flow business as well as an asset.
The margin between the purchase price and the rent you can achieve is key and is also what BTL mortgage lenders are interested in.
It might be better, for instance, to spend £70k a piece on two terraced properties which will rent out at £550 per month, rather than spend £140k on one semi-detached house that will only rent at £650 per month.
Should the property need refurbishment work, you need to manage your costs well. Keep it as simple as possible and don’t be tempted to express your own personal tastes in the decor. Magnolia walls and a good kitchen and bathroom is all it really takes.
An Investor will also need to consider the area they wish to invest in – do your research; and do your due diligence. Get to know the local market as best and as thoroughly as you can.
- What is the potential rental yield?
- How does the yield compare to the purchase price?
- Is there sustainable rental demand in the area?
- Is there potential for capital growth?
You have to study the area in detail, checking historical data – sales, average rents, market improvement and price rises – before making any decisions about a property.
That way you will know for sure whether your goals are achievable.
By Rob Jones
The key takeaway here is that BTL mortgage lenders want to work with applicants with a good credit history, who have an eye for a solid investment with good yields.
So, to get up and running with investing in property, the trick is to keep it simple and you shouldn’t go far wrong.
And, if you wanted to contact Matthew about property finance and mortgages you can contact him here.
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