So you’re thinking about buying to let. Or you may have already thought about it and have amassed a property empire. Whatever your situation is, we’ve put together a list of things you’ll need to consider when taking on your first or next investment property.
How does it work?
The amount you can borrow on a Buy To Let mortgage depends more on how the property itself will perform as an investment, than the amount of money you earn.
Typically, you’ll need a 25% deposit. So your mortgage will be 75% of the property value. Having this rule in mind is a good starting point.
The next thing to consider is the rental income. This will actually determine how much you can borrow (up to the agreed maximum of 75%).
Lenders calculate this by doing a sum. It’s called “stress testing” and they do this to make sure that if interest rates rise, you’ll still be able to cover the mortgage with the rental income. It also has to factor in your personal tax situation, as remember that any income you generate from a rental property has to be declared on a tax return.
What’s the sum I hear you say? Well, there are several, but as a starting point we need to establish a couple of basics.
- The lender may lend you the money at 2%, but they want to know that you can afford it if rates when as high as 5.5%. This is called the “stress rate”
- Next, they want to make sure that the rental income covers the monthly interest only payment by a certain margin. In most cases, this is 45%. So if your monthly payment was £100, the would want the rent to be at least £145.
So lets run an example, using nice easy figures.
You’ve seen a house for £100,000 that you think will make a great rental property. First you’ll need your deposit – £25,000, followed by a mortgage of £75,000.
Next, we need to know the mortgage is affordable based on the rental income. So we take £75,000 and apply an annual interest rate of 5.5% (the stress rate).
£75,000 x 5.5% = £4,125 per year.
Divide this figure by 12 to give us the monthly interest only payment at 5.5%, which is £343.75.
Then we factor in the “buffer” of 45%. To this we multiply 343.75 by 1.45, which equals £498.43
And that’s our golden number. If the rental income on the property is £498.43 or more, your mortgage is likely to be approved.
There are of course many different variances to this, however it is useful to have a starting point to help manage expectations. Your adviser will clearly explain all you need to know, and help you do the sums on any property you might be looking at.
What Else Do I Need To Know?
Whilst each lender is different, it is worth considering that there are some common trends among the lenders for things they will look for. To help you in your expectations, MOST lenders will want to see the following:
- A personal income of around £25,000
- A good credit score
- That you are at least 18 years of age. 21 in some cases
- That you already own the house you live in (called being an “owner-occupier”)
- A satisfactory building survey or mortgage valuation. Your adviser will arrange this for you
What about Limited Company Buy To Let Mortgages?
Over the last couple of years, lots of landlords have purchased their mortgages under a Limited Company that they set up, instead of owning the properties personally. This is a result of recent tax changes made by HMRC and what you are allowed to claim for based on your expenses of running a rental property.
Lenders have been quick to respond and many lenders now have an offering for people who wish to own their rental properties in this way.
If you think this might be the right option for you, we recommend speaking to a qualified accountant or tax adviser. We cannot recommend or advise you to set up a Limited Company as this decision will be based upon your tax situation.
Here are some things to consider if you decide to buy your property this way though:
- Your company will need to be a specific type of company called a Special Purpose Vehicle, or SPV for short
- Companies House has a list of codes that apply to a company called Section Industry Codes (or SIC for short). Your company will need to have the relevant SIC code. Your adviser can let you know which one you’ll need
- A Special Purpose Vehicle Company (SPV) cannot be a trading company. So if you’re already trading as Joe Bloggs Fashion Design Ltd and were an already established business, you would not be able to buy the house under this company with these lenders. You would need to get specialist commercial advice. However, if you established Joe Bloggs Property Rentals Ltd as an SPV, then you would.
- Rates and fees may vary from a Buy To Let mortgage taken out under a personal name. Your adviser will help you establish the most cost effective mortgage based upon your needs.
- Finally, if you take a mortgage through an SPV, the lender will still as you to sign a Personal Guarantee, confirming that you will be responsible for paying the mortgage back. This is an important document and you will be required to get independent legal advice before signing it. You will be responsible for the cost of this legal advice.