A Guide to UK Buy to Let Mortgages
Essentially there is little difference between the process that one follows for a buy to let mortgage in the UK than there is for any other type of mortgage. The lender still has to consider your credit worthiness, the value of the property, how much down payment you can afford and all of the other usual considerations. However, in addition, the lender will usually be interested in what the market is for letting properties in the same area as the one that you are thinking of investing in.
The lender will look at property taxes and average rents for similar properties. Other than those particulars, however, the process moves along nearly the same.
A buy to let mortgage can be arranged for either commercial or residential property. Terms can range from between five to forty-five years. There are fixed and variable interest schemes available, and the lender takes an interest in your property just like with any other mortgage so your property is still at risk if you fall into arrears.
One difference is that a lender will consider your potential cash flow from rental income as part of your available money to repay the loan under some circumstances.
Because not all lenders view buy to let mortgages as a risk that they are willing to take, your best route is to choose a mortgage broker who specializes in buy to let schemes. This way you have the best opportunity of getting you application reviewed by the largest number of lenders who are likely to make a decision in your favor. Since you do not have to pay a fee to engage the broker there is no reason not to take advantage of their services.
Before you buy
You should work with either a commercial or residential real state broker, depending upon the type of property you are looking to invest in, who understands the buy to let market in the area that you are considering. Choose an agent who is bonded and who has a large portfolio of potential properties for you to review.
Have your broker help you choose areas that are compatible with the type of property that you want to buy. Choose property that matches the needs of the area. For example, you might find it hard to fully let an office building in an area that is used primarily for light manufacturing.
Likewise, a warehouse might not go over well if it is surrounded by an office park complex. If you are thinking about purchasing residential property with your buy to let mortgage then make sure that you look in neighborhoods where there are already properties for let. It may be very hard to let a home in a neighborhood populated exclusively by high-income home owners.
Planning your cash needs
You should also determine the maximum that you are willing to spend to buy property. Besides considering the purchase price you will need to determine your available down payment and other expenses such as the services of a solicitor, stamp duty, survey/valuation fees, broker fees etc. You should also consider after-purchase expenses including remodeling to make the building fit for its intended usage, utility deposits and agent's fees if you plan to use a letting agent to attract and vet tenants.
Other expenses are sure to include insurance, routine property maintenance plus ground rents (if applicable) and property taxes. Usually your tenant is responsible for utilities after they move in as well as any Council Tax, TV licence fees, and the like.
Consult with your accountant
In many cases there are tax allowances and deductions which can be taken against rent that you receive. Your usual and customary expenses, including maintenance, insurance, cleaning and landscaping, as well as other recurring expenses likely apply. While you may not deduct the actual cost of your initial improvements, subsequent repair and replacement of those improvements likely will be deductible.
In some cases you can take a flat 10% of the rent as a deduction against normal wear and tear. The tax maze can be very complicated so be sure to let your accountant help you navigate it.
During the buy to let mortgage loan process
If you are using a mortgage broker then you will not have to jump at the first approval that you receive. The chances are you will be presented with multiple offers. Read each one over and set aside the ones that are so far away from your expectations that even intense negotiations could not make the offer better.
Re-read the remaining offers and make a list that details the good and bad points of each one. Send the offers and your list to your solicitor and have him review the contract and your concerns.
Once you are through with that step its time to negotiate. Depending upon the level of service that your broker provides you can either have them handle the negotiations, or you can hire your solicitor, or you can do it yourself.
What can/should be negotiated? Anything from the term of the loan to interest rates, pre-payment or early cancellation fees, payment due dates, lender's fees, fixed and variable interest rates, items of concern found by your solicitor and anything else that doesn't strike your fancy the first time out. There is no risk to attempting to negotiate and you can always be sure that you will NEVER get what you want if you don't ask for it.
Buy to let mortgages used to be very hard to obtain and only people who didn't really need the money were able to get approval. This is no longer the case. Competitive lenders, especially those lenders who work with buy to let mortgage brokers, realize that the market for residential and commercial property letting is on the rise again.
Now is the right time to find a broker and get busy building your investment portfolio of properties.
About the Author
Commercial Lifeline are independent Commercial Mortgage brokers saving you money on your Commercial Mortgage and Bridging Finance through lender choice.
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Darren Yates
