Top 5 - BTL tips

Hi, guys. Dan and Kye here again from Crescent Mortgages, and today we're going to be giving you our top five tips for buy-to-let mortgages. So first of all, what is a buy-to-let mortgage? This is a mortgage that you'll use to purchase a buy-to-let property, which is a property that you won't live in yourself.

Instead, you'll let the property out to a tenants, or multiple tenants, who will pay you a regular rental income. Yeah, there are lots of reasons why people would possibly buy a buy-to-let property a pension plan, is often one we hear. Medium or short term investments as well, or potentially just to increase that regular

monthly income alongside any other income you have. Number one, your buy to let mortgage affordability assessment. So unlike a residential mortgage, which will really focus on your personal income to determine how much you can borrow, a buy-to-let mortgage is mostly focused on what the rental income will be that the property produces.

Now, there may still be some minimum income requirements for how much you earn from your personal salary or self-employed income , we'll come to that in a moment on one of our further points, but regarding the rental income. So it's really important that you remember that just because, for example, the property that you're looking at might produce £1,000

a month rent and your mortgage payment on an interest only basis, which again will give you more information about interest only in a moment, your mortgage payment may only be around £200 to £300. That doesn't mean that the mortgage is automatically going to be agreed because the lender will actually run a stress test based on a higher

interest rate because they believe that rates may be increasing in the future. So even though your mortgage payment might be, for example, £250 by the time the lenders run that stress test, it might be that the rental income needs to be around twelve hundred pounds a month for you to achieve the mortgage that you're hoping to get

. So you need to find out what the rental income will be on the property that you're interested in. And then to be honest, if you run it past your broker, they'll be able to run the numbers, run the stress test and confirm if it's going to be possible that you can obtain that mortgage on that particular property

.The stress test, as Dan said is there for potentially increased rates it's also there for rental voids and maintenance costs and other things that can happen when you own another property. And as Dan mentioned that they will use a different interest rate to calculate to try and give you an example.

If you're looking £100,000 mortgage, the rental income would probably need to be somewhere from £520 to £665. If you're looking at the top and bottom end of most calculations, which generally is achievable, you can extrapolate the numbers from that.

If you look at £200,000 mortgage, obviously double those figures £300,000 mortgage, triple the figures and you can start to see what kind of rental income requirements will be required to obtain the mortgage that you need. Number two, your upfront costs.

So first thing to highlight with a buy to let mortgage is that the deposit requirements are bigger than normal residential mortgages. So if you've purchased your own home, you know that you can get away with a 5% or 10% deposit with a buy-to-let mortgage.

You generally need a minimum of a 25% deposit. Now, we should highlight that there are a couple of lenders that might be able to accept 20%, but you are really, really limited in the interest rates are higher. So ideally, a minimum of a 25% deposit will be required.

And on top of that, there are other fees that are involved, a lot of fees are similar to residential mortgages. So sometimes there will be an arrangement fee with the mortgage itself. Although they are bigger when buying a Buy to let, so that it's not unusual to find a fee for £2,000 rather than maybe £1,000 on a residential.

And on top of that, you will see more likely to get a valuation fee. Certainly when buying, you'll still have your legal fees. That doesn't change too drastically other than the stamp duty. If you're buying additional property which generally a buy to let will be then an additional 3% within England, at least, the stamp duty

due to the varies a little bit. But you do have to factor in generally and relatively sizable change in the stamp duty. Obviously, we we don't give tax advice ourselves so do check that, but stamp duty and deposit are the really big parts that you need to factor in to fees.

Number three, consider the type of property that you're purchasing. So the type of property and the condition of the property will have a big impact on your ability to get a buy-to-let mortgage. So one example is the property will have to be in lettable condition at the point that the lender carries out the mortgage valuation, which will

be quite early in the process. So some people do consider purchasing these properties, potentially to do a full renovation or possibly get themselves in there. Give it a lick of paint. Sort out the kitchen, the bathroom before you're able to get a tenant in there.

But if the valuer looks at the property during the mortgage application and feels that the property is not in lettable condition at that point, then the likelihood is that they'll report back to the lender to decline the mortgage or significantly reduce the the rental valuation, which may make it very difficult for you to obtain the mortgage.

Yeah, I think the by "lettable", could you let it on day one, could you physically let that property out? Maybe you'd like to increase and make it better. But if you think it could be let on day one, that's roughly the sort of line that would be taken and other variations or possible problems of properties; high rise

flats. You know, a 10 storey, maybe ex local authority property. Those two combined can be a little bit tricky. Newbuilds. And generally properties with slightly obscure construction types as well can have a problem, similar to residential, but maybe slightly more on a buy-to-let basis. I should just elaborate a little bit further on my first point.

So if you are purchasing a property in the current condition, the rental valuation will be around £1,000 a month and your intention is to, in the first few weeks of buying the property, you know, paint, hardwood floor, carpet , fixtures, fittings, that kind of thing, which you think would increase the rental income to £1,200 a month

. Again, the lender is going to base it on the current condition. So the current lettable valuation of £1,000 rather than the £1,200, once you've done the work because the lender has no guarantee that you will do that work up to a decent standard once that the mortgage has started.

Good point *chuckling*. Number 4. The type of tenancy that you set up on the property. So there are lots of different types of tenancy agreements that you can organize. The most common is an assured shorthold tenancy agreement or AST, which will be commonly referred to, which is usually around twelve months.

Now, if you just put one person or one couple one family in the property on a twelve month AST that's considered very, very standard, and pretty much every lender will be happy with that. If you start to break away from this and look at anything kind of a bit less usual, maybe students or houses

of multiple occupancy, or HMO, where you've got multiple tenancy agreements if you're kind of subletting it through a through an agency. They're they obvious ones, any other examples you can think of. It may be letting to a company anything that.

Yeah. Corporate, yeah. Will really reduce your options. They are possible, but it will reduce your options. So again, if that is your intention. Make your broker aware when you have the initial conversation with them so that they can let you know what kind of options you're going to have.

I think the other one, which is starting to become more and more popular is Airbnb, which up until recently was very, very difficult to get a mortgage on a property that is intended for Airbnb. There's possibly a couple of lenders that may consider it now, but it is still a big limitation.

So so you are going to be seriously limited if that is your intention. But again, run it past your broker and they can they can look at options for you. Number five, final things to consider. So there are lots of areas that you can trip up and there are lots of areas which are kind of specific to

buy to let mortgages. Just to give you some of the kind of the obvious ones that we've discussed, which we think that you should be aware of. So the first one is.... options can be very limited if you're a first time buyer.

So if you don't own your own residence, you may find it a lot more difficult to obtain a buy-to-let mortgage lenders. Generally, they need to be really careful that people aren't taking a buy-to-let mortgage but actually intending to live in the property themselves.

So if you're a first time buyer, you are higher risk of possibly living in the property yourself. So there may be one or two options. If you are a first time buyer, but it's a big limitation. Anything else you can think of?

Yeah, on top of that, and as Dan mentioned. And if you own your own home is great. But if you own a property in general, that that does help a lot. Minimum income. I think we touched on, possibly earlier in the video.

Generally speaking, you actually can have a £25,000 income then that normally satisfies most, although again, some have no minimum income at all, so that does does help. Those are the really big ones. Also, just to let you know that most it's most common for people to take a buy-to-let mortgage on an interest only basis compared to capital

repayment. So if you take out a normal residential mortgage, it will probably be capital repayment where your mortgage payment consists of the interest and clearing the capital down. So at the end of the term, you'll be mortgage free.

It's more common to take a buy-to-let mortgage on an interest only basis where you are just paying the interest. Now the benefit of this is that your mortgage payment will be lower because you are just paying the interest, however, because you're not paying the capital down at the end of the term.

You will still have the full mortgage balance to clear, where you may need to sell the property or pay off with other with other means that you have at the time. So, yeah, so more common on interest only, but you don't have to.

It is down to your personal preferences, which you can discuss with your broker, and they'll give you the relevant advice. OK, guys, we hope you enjoyed our top five tips for buy-to-let mortgages. I'm sure there's lots of questions.

So if you do, give us a call. Drop us a message. And hopefully we can assist you to find your first or second or third buy-to-let property. Don't forget we're free!