Complete Guide to Buy to Let
This could be the best move to make a good living into the future. People will always need homes. If you’re researching buy to let, this article’s for you. Whether you’re buying a place that’s ready to let or a property you’ll need to do some work on first, here’s our expert buy to let guide. Read on to discover a beginners guide to buy to let stacked with essential knowledge about how buy to let mortgages work, how many you’re allowed to have, how the whole thing works, and how to build your own buy to let portfolio. By the end of it you’ll know whether you want to let the idea go – or go for it.
How does Buy-to-Let Work
You buy a buy-to-let property intending to let it to someone else. How does buy-to-let work? Buy to let properties are usually funded by specialist mortgages. The purchaser becomes the property landlord, letting it to tenants who pay a one-off deposit and monthly rent. As the landlord, the rent covers your mortgage repayments and life assurance premiums, ground rent, maintenance and other potential expenses, leaving you with a fair monthly profit.
As an investment it gives landlords a regular income and decent potential long-term yields as the property’s value increases. There’s also a social benefit to getting involved in buying to let. Landlords provide an essential service to people who can’t afford to buy, or are saving up for a deposit.
What happens when property values are falling?
It’s unusual but it can happen, but a drop in property values tends to be temporary. When the financial crisis, economic wobble or whatever else has caused it fades away, house prices go back up. And there’s an up-side for landlords as well as private buyers. It’s cheaper to buy properties when prices are falling, and your mortgage repayments will be lower.
Buy to Let Mortgages
How do buy-to-let mortgages work? A buy to let mortgage is designed to support people who want to get into letting. You can’t buy a place on a regular mortgage then lease or let it without the mortgage lender’s permission. Residential mortgages come with terms and conditions, and that’s one of them.
The vast majority of specialist buy to let mortgages are paid back ‘interest only’, which means your repayments are lower but you don’t pay back any of the property’s capital value. It’s rare to buy to let on a repayment basis, where you pay back the capital and interest at the same time.
You can borrow an amount based on the potential rent you’ll be able to charge, completely different from a regular mortgage where it’s based on a multiple of your income. And because lenders know buy-to-let mortgages are intrinsically more risky, you’ll need to put down a sizeable deposit. Think 25% of the property value. The extra risk is also why the interest on these mortgages are usually higher.
The Bank of England has been imposing tougher lending restrictions recently, thanks to the economic situation, and these include stricter affordability tests using something called Interest Cover Ratios or ICRs, the ratios between a properties rental income and the mortgage repayments. These days you’re probably looking at a predicted rental income of 125% of your mortgage repayments. It’s also worth bearing in mind some buy-to-let mortgages have very good rates but the up-front payments are very high.
Take all this into account and do the sums before making a decision. Because you’ll have some serious financial responsibilities to deal with, you’ll want to factor some fat into the numbers to give yourself wriggle room.
It’s a good idea to think about the worst case scenario. Property letting is a business and like every business, you’ll want to make plans based on the best, average and worst cases, then plan what you’ll do if the worst thing happens. If interest rates shoot up, can you still pay back the mortgage? If you put the rent up, will your tenants still be able to afford the rent? If not, will you be able to attract new tenants at a higher rent? How will you feel about being forced to evict good tenants otherwise you’ll get repossessed? How will you cope with having to sell up or lose your investment? These are all things that can be managed with a good plan in place.
Building a Buy to Let Property Portfolio
Despite the above, investing into property is still one of the most lucrative business ventures so, next we’ll look into how to build a buy to let portfolio.
A Portfolio Landlord is someone with four or more mortgages. How many buy-to-let mortgages can you have? Is there a limit to the number of BTL mortgages you can get? The answer is no. But in real life there are usually some common sense limits designed to protect the lender and borrower. Most lenders set their own limits. A mainstream mortgage lender will probably come in at 3 to 5 buy-to-let mortgages per person.
How about taking out buy-to-let loans with multiple lenders? Again, some lenders impose restrictions. The number of buy to let mortgages you can have with a single lender varies. If you have grand plans, shop around for the lender with the most potential for lending you enough to make a good-sized portfolio. It’s good to build a trust-driven relationship with a lender you like and respect.
What do lenders take into account when deciding whether to fork out more money to an existing landlord? They’ll think about the value of the total property portfolio, and the amount you want to borrow. They’ll consider the way you manage your existing properties and how they’re administered. Your cashflow forecast will help them decide, and they’ll want to carry out credit checks.
If you’re new to letting but you’re keen to get into it, lenders will want to know a lot more. It’s harder to apply for a buy to let mortgage than a regular one. Will you be eligible? You usually have to own your own home, either outright or with a residential mortgage. Your lender will examine your financial situation. A good credit rating is essential, without big credit card debts and loans. Your salary also counts. Lenders expect landlords to be earning at least £25,000 a year. Age is a consideration too. Lenders tend to have upper age limits of 70-75. But the age you will be at the end of the mortgage term matters most of all, simply because most mortgages last 25 years. On the other hand some lenders have age limits as high as 90.
Thinking ahead, you will ultimately pay off your buy to let interest-only loan when you sell the property. If house prices have fallen since you bought it and the value is less than you paid for it, you’ll cover the balance with your own money.
Grow your portfolio today
We hope you’ve found our buy to let guide useful. Now you know what the buy to let scene involves, how the mortgages work, what can go right and what can go wrong, you’re ready to make that decision. We can help you get where you want to be thanks to years of expertise and a deep knowledge of great property deals. Strawberry Star will help you grow your buy to let portfolio sensibly, sustainably and wisely. Let’s discuss the potential.