Buy to Let Mortgage: 10 Things You Must Know
Here’s something we can all agree on, hindsight is a wonderful thing. If only we could apply the knowledge we have today to past events. Nothing could be more relevant than beginning the journey as a property investor. For anyone on the cusp of applying for their first buy to let mortgage, before signing any documents, here are 10 nuggets of information that could save time, money and stress.
What is a Buy to Let Mortgage?
Buy to let mortgages are designed for financing property where the sole intention is to rent the property to tenants, and therefore carry their own set of rules, regulations and conditions. Thinking that the cheapest mortgage will do will be a one-way ticket to Troubletown. Therefore, we cannot stress enough the importance of seeking professional advice from qualified people. More on that later, but for now let’s start with some simple facts.
- You do not need to be employed
It is easy to think that earning a good salary from a reputable employer is a necessary tick-box to get a buy to let mortgage. Each mortgage lender will have their own specific requirements, however a key consideration will be the profitability of the deal as opposed to your personal income. Hence being a PAYE employee is not essential.
- Credit scores matter
Keeping a check of your credit score is necessary housekeeping for anyone in the property investment arena. The bottom line is that your credit score will have a direct impact on how you are perceived by lenders. Things like being close to credit card limits, missing payments and even having no credit history at all, will negatively affect your borrowing potential. You will have several different credit scores spanning various credit reference agencies, however you can sign up to check if the information they hold on you is accurate and up to date.
- Business plans
Buy to let mortgage lenders will want to know all about your proposed investment so they can estimate its level of risk. Now will be the time to do your research, crunch those numbers and know the costs and cashflow of the deal. Along with your numbers, be clear about your longer-term strategy as this will help you to be guided towards the right mortgage product by your broker.
- It will cost more than a residential mortgage
Buy to let mortgages will demand a larger deposit and higher interest rates than a residential mortgage. The difference will vary greatly due to your circumstances, the type of deal you are financing and the general economic conditions. Simply learn to include these numbers in your calculations to see if the deal will work or if it will be a regrettable burden 5 years down the road.
- Base rates
The base rate is what the Bank of England charges banks who owe them money. This rate will influence what the banks charge their customers for mortgages. If the Bank of England changes their base rate, well guess what? So do the highstreet banks. Base rates can go down but they can also go up. It is therefore important to include a sensible ‘buffer’ in your calculations to cover yourself if things get pricey.
- Property tax
To address concerns about the property rental market, the UK Government has and will continue to make changes to how investment properties are taxed. These changes may alter your strategies and business structures and as a result dictate the suitability of certain mortgage products. As with most things property related, knowledge is the key to stay ahead of the game as you could find yourself up the creek of silly mistakes. If in doubt, speak to a qualified tax adviser who should be in your power team already, along with…
- Your mortgage broker
In the world of buy to let mortgages, your new best friend will not be the bank but will be your mortgage broker. Yes they will charge you a fee, however a good broker will be worth it ten fold. They can advise you on the most suitable products for your specific needs and strategy, they will make sure the forms are correct and the information you give is sufficient. They will also be able to advise you on hidden costs.
- The hidden costs
Yes I am afraid there may be hidden costs applied by the your mortgage lender. These could be such things as a valuation fee, re-inspection fee or a completion fee. Again, the value of a good mortgage broker will become apparent as they should highlight all of these extra costs upfront. They should also offer indispensable advise on the following two points that could scupper your plans.
- What is it made of?
Firstly, we have the words that will send a shiver down the back of any mortgage lender… non-standard construction. Very broadly speaking a standard construction building will be made of brick or stone and have a standard roof of tiles or slate. Non-standard construction properties tend to be made of such materials as timber or prefabricated concrete, but they can be quite varied. These are viewed as high risk by lenders and red lights will start flashing.
Secondly is the EPC rating of the property, or Energy Performance Certificate. Energy efficiency is understandably a large area of focus within the property world and when it comes to rental properties, minimum requirements are applied. If the EPC rating of the property you are hoping to acquire is too low you will not be eligible for a mortgage. Your friend the mortgage broker will advise you and guide you through your options. You can probably guess how this will end.
That’s right, before applying for a buy to let mortgage, always seek advice from those who are qualified and knowledgeable. Having the right team around you is crucial if you want to make a profit and stay out of trouble. Surround yourself with a supportive community, invest in your own knowledge and make informed decisions rather than assumptions.
These are key components that are valuable at the beginning your journey which is why at Asset Academy we are here to make your life easier and more successful from the start. To take your first steps why not register for our next FREE Discovery Training Webinar here. It will be one hour learning the basics of investing with one of our expert investors.