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How much can borrow?
The amount you can borrow is generally based on the rental income that your property could realistically achieve on the open market. Your personal income is generally irrelevant. Most lenders will require that the rent covers the monthly interest payments by between 125% and 130% of the monthly interest payments depending on the lender. This is based on a maximum Loan to Value (LTV) of 85-90%. The actual lending criteria, varies from lender to lender.
Should I choose an interest only or repayment mortgage?
An Interest only mortgage requires you to pay only the interest element on your mortgage each month. At the end of the term of the loan, you will still owe the same amount you originally borrowed. You should usually put away money in an ISA, or a similar investment vehicle, to ensure the loan is repaid in full at the end of the term. Alternatively you would sell the property at the end of the term and repay the mortgage with the sale proceeds.
A repayment mortgage on the other hand, requires you to make monthly repayments over the term of the loan. The monthly repayments will include both capital and interest depending on the term of the loan. At the end of the mortgage term all of the capital will have been paid off, and you will owe nothing to the lender.
The majority of investors generally choose interest only mortgages as oppose to repayment mortgages for tax purposes. One of the main reasons for this is that mortgage payments are tax deductible. In other words it reduces the investor's tax bill.
What is a fixed rate mortgage and how does it compare to a discount rate mortgage?
A fixed mortgage allows you to fix your mortgage rate for a given period of time. You may pay a higher rate of interest for this security, but this may be worthwhile if you want to budget for your monthly payments. You may also want to lock into a fixed rate if you think rates will increase.
A discount rate mortgage is discounted against the lenders Standard Variable Rate which in turn roughly tracks the Bank of England Base Rate. Discount rates are usually discounted for a period of 2 – 5 years. This is normally well below the lenders Standard Variable Rate. Typically lenders offer attractive discount rates, however they do not offer the predictability of a fixed-rate mortgage.
What if the rental does not enable me to borrow the amount I require?
In occasional circumstances, it may be appropriate to challenge a valuation where the rental does not stack up. You can provide the surveyor with actual comparables for similar properties that have been rented out recently. If you can obtain a minimum of three actual comparables at the level of rent you require, a surveyor may agree to
up the rental valuation.
Alternatively, if the property is already rented out, then a copy of the current Assured Shorthold Tenancy agreement (AST) may be acceptable as a means of upping the rental valuation.
What other costs are involved in purchasing a buy to let property?
| 1. | Solicitor's fee: You can expect to pay around £500+ VAT. The cost will usually depend on the amount of work your solicitor is required to do. Re-Mortgages tend to be easier and therefore cheaper.
| | 2. | Valuation and survey: The lender will require a valuation to be carried out before formally making a mortgage offer. The valuation fee will usually cost between £250 and £400. If you are purchasing a new house, this may be the only survey you need. If, however, you are purchasing an old property, or one you intend to renovate, then a full structural survey may be required. This may cost between £400 to £1,000 depending on the property's value.
| | 3. | Local searches: These are done by the local authority who will check to ensure that there is no reason why the property shouldn't be sold. For a fee (£100 to £250) they will check that there are no planning issues which you need to be aware of (e.g. new road or housing development).
| | 4. | Stamp duty: If you are purchasing a property for more than £125,000 , you are required to pay the Inland Revenue Stamp duty. Stamp duty tax bands are between 0% and 4% depending on the value of the property.
| | 5. | Land registry fee: The actual charge will depend on the value of your home, but you can expect to pay around £125. It may be more than this if your house hasn't been previously registered
| | 6. | Arrangement fee: Depending on the lender, you can expect to pay from 0.5% to 1.5% in arrangement fees. Most buy to let lenders will allow you to add this amount to the loan should you so wish.
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I can’t prove income, can I still get a buy to let mortgage?
The majority of buy to let lenders base their lending criteria around the ability of the property to generate sufficient rental income to cover the monthly interest payments. Your personal income is generally considered irrelevant by most lenders. Some lenders require a minimum income level. This is generally between £10,000 and £25,000 per annum.
I want to rent a property out on a room by room basis, will a lender allow this?
Renting properties on a room by room basis is a specialist area. From the landlord's point of view, this can be lucrative and often generates higher rental yields. There are lenders who are happy to have tenants renting on a room by room basis, and in some instances they will use this figure to calculate the Rental Cover. On this basis, it is often possible to borrow a larger amount subject to the usual lending criteria.
What is a gifted deposit?
A deposit is a sum of money that a buyer puts down on a property to secure the purchase of that property. This can be as little as 10% of the value of the property, but this varies from lender to lender. A gifted deposit is when part of the balance (say 5%) is paid by the company/person(s) selling the house, and is commonly offered on new build properties.
What is the difference between freehold and leasehold?
A freehold property is one where you own not only the building, but the land it is built on as well. A leasehold property in contrast, is one over which you have joint ownership of the building, for a specified number of years. The property and the land on which it is built is owned by a landlord or a freeholder. The term of a lease is typically between 99 - 999 years, and diminishes in value the closer it gets to the end of the lease term. When buying leasehold property, ground rent
is generally payable to the landlord, and service charges are payable to the managing agent or landlord.
What is conveyancing?
The term 'Conveyancing' refers to all the legal and administrative work associated with transferring the ownership of land or buildings from one owner to another. The conveyancing process starts after an offer has been made and accepted for a property, and solicitors' details have been exchanged by the two parties.
What is a decision in principle?
A decision in principle is an acknowledgement from a mortgage lender that you meet their minimum lending criteria, including a credit check.
How long are mortgages usually for?
Depending on the age of the applicant or the preference of the client, the typical term is 25 years, though they can range from 1 to 30 years. If you have a repayment mortgage, your monthly payment will vary according to the length of the mortgage. Generally speaking, the shorter the term, the higher the monthly payment.
The monthly payments on an interest only mortgage do not include capital repayments. The original capital sum borrowed will therefore become payable in full at the end of the mortgage term.
How can I check my credit rating?
There are two main credit reference agencies, Equifax (www.equifax.co.uk) and Experian (www.experian.co.uk). Most lenders use these reference agencies and in most cases you can obtain a copy of your personal credit report online for a small fee.
How much stamp duty will I have to pay ?
The amount of Stamp duty you will have to pay (based upon current legislation) is as follows:
| Property Value | | Rate |
| Up to £125,000 | | 0% |
| £125,001 - £250,000 | | 1% |
| £250,001 - £500,000 | | 3% |
| £500,001 onwards | | 4% |
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