Rent must exceed the repayments for a number of reasons
It is generally necessary to have some cash put aside to take care of emergencies. You will also need additional funds to cover the cost of stamp duty, which is higher when buying to let, more so as your portfolio increases.
When looking for your mortgage, you can, of course, approach banks, or even look online. However, mortgage brokers such as The Mortgage Hut, which specialises in the buy to let field will have a better idea as to what is available and can provide more informed advice on the best way to proceed, especially if your personal circumstances are a little different from those that lenders hold up as the ideal.
Once you have secured the property, there may be tax issues to consider as well, including the income generated each year and any profit on eventually selling the property which may be subject to capital gains tax. We would recommend that you consult a tax adviser in this regard.
How do buy to let mortgages actually work?
Where do I start?
Ideally, when embarking on a buy to let venture, your personal debt and finances will be managed well, as large personal debts can deter some lenders.
- A good credit record will always be a benefit when looking for any kind of mortgage.
- A stable income is also a prerequisite, usually in excess of £25,000 annually.
- Many lenders are wary of prospective mortgagees who cannot demonstrate how they will make their repayments each month.
- The age of the applicant can also play a role in being approved for a mortgage. Most lenders want applicants to have reached a maximum age of around 75 on completion of the mortgage term. So if you are 60 and applying for a buy to let mortgage, the term of the mortgage would probably be only 15 years or so. It is not always easy to line up a mortgage when you are on the verge of retiring.
How much can I borrow?
There are other factors to bear in mind when looking at a buy to let investment.
- The mortgage you get will probably incur higher fees than those you would pay for a residential mortgage.
- The deposits tend to be larger as well. Individual lenders vary as to what they require, but the minimum deposit is usually around 25 per cent, and can even be as high as 40 per cent of the asking price.
- Many mortgages for buying rental property are interest only, which means that the monthly repayments can be lower but then you will still need to find the amount you originally borrowed at the end of the mortgage.
- There is also the option for a repayment mortgage when buying rental property if the projected cash flow from the rental income can cover it.
Many lenders expect the rent from the property to be between 25 per cent and 45 per cent higher than the repayment you make on the mortgage each month. It is important to get an accurate assessment as to what rent you can hope to achieve.
Do this by looking at listings for similar properties in the same area and same type of situation and see what tenants are willing to pay. This is one factor determined by market forces, so it is vital to know where those market forces are heading. If your buy to let flat is on a busy road, it may not bring you the same amount of rent as a flat around the corner on a quiet, tree-lined street.
Because we play by the book we want to tell you that...
Your home may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for mortgage advice. The actual amount you pay will depend upon your circumstances. The fee is up to 1.5%, but a typical fee is 0.3% of the amount borrowed.