Mortgages Explained For Investment Buyers
While there is a lot of mortgage advice available, most of the advice is aimed at first-time buyers or people looking to move up the property ladder. This overlooks a sizable part of the market, investors. The buy-to-let market is big in the United Kingdom and given the rising need and demand for rental property, an extremely important part of the market too. This guides aims to explain mortgages for investment buyers.
The most common form of mortgage for investors is buy-to-let (BTL) mortgages. As investing in property, even when there is a high level of demand for rental opportunities, represents a risk, it is important to know what is involved with this style of mortgage. It also means that lenders will be looking to implement safeguards to the mortgage they provide, so make sure that you are comfortable with the terms and conditions of your mortgage.
First of all, you’ll find that it is difficult to obtain a mortgage for investment purposes if you don’t already have a mortgage in place for your own home or own your property outright.
Your credit status will impact on your ability to obtain a mortgage
Another aspect that will be very important is your credit status. You must have a good track record when it comes to credit and you must show that you aren’t stretched too much financially. This means that if you have credit cards, you shouldn’t be near the credit limit and you should be able to show that you pay all of your bills on time and in full.
All mortgage providers carry out “stress test” checks on applicants and you’ll need to prove that you have sufficient funds to deal with any issues or changes to your current financial status. It is also likely that the mortgage lender will look for you to earn at least £25,000 a year.
Also bear in mind that mortgage lenders are likely to have an upper age limit that they use as part of their criteria when providing mortgages. This is likely to be 70 or 75 years old and remember that this is the age at the end of the mortgage, not the beginning. If you are 45 when you apply for a mortgage and you take out a 25 year mortgage, the mortgage will be paid off or concluded when you are 70 years old. For many mortgage lenders, your current age will be at or close to the cut-off point in providing mortgage funding.
BTL mortgages differ from ordinary mortgages
While BTL mortgages are similar to ordinary mortgages in many ways, there are some notable differences that you will want to consider:
- The interest rate for investor mortgages is usually higher
- You will often be asked for a higher deposit for an investor’s mortgage
- The fees associated with an investors mortgage are higher
- Many BTL mortgages are interest-only mortgages
While every mortgage provider will have their own criteria, which can also depend on the applicant, it is common for lenders to request a 25% deposit. The thought of finding a quarter of the value of the property is a concerning one for many would-be investors but there are some mortgage lenders that request 40% of the property value to be placed as a deposit.
While the idea of an interest-only mortgage is of benefit to some people, as it should result in lower payments on a monthly basis, it does mean that the capital amount has to be paid in full at the end of the mortgage. If your intention is to earn rental income over the lifetime of the mortgage and then sell the property, you will benefit if property prices rise but will be at a loss if property prices fall. Also, if your investment plans centred on enjoying the property in your later years, you will need to raise the capital amount separately to be able to pay it off.
Another factor to consider when taking out a BTL mortgage is that they are not necessarily regulated by the Financial Conduct Authority, the FCA. Their regulatory support is only on offer when purchases are made in the more traditional manner but if you choose a mortgage from a lender that is FCA authorised, you should receive a fair level of treatment. If you have any concerns about your treatment from a lender, you can contact the Financial Ombudsman Service for support and guidance.
Given that the amount of money you can borrow is linked to the rental income that you’re likely to receive, you’ll need to have these calculations available at the time of your application. Mortgage lenders usually look for a rental income that is around 25% to 30% higher than what is being paid on the mortgage each month. This means you should do your research on expected rental income for property areas and property types.
Think about the additional costs associated with a mortgage
It is also important to remember that there is a range of additional costs associated with arranging a mortgage and buying property. This means that your budget has to have room for leeway with respect to mortgage arrangement fees, solicitor costs and other legal costs. There is also the fact that as of April 2016, investors buying an additional property in the UK now face a higher level of stamp duty. This additional 3% duty on additional property purchases has caused many investors to revaluate their ability to gain a good return on their investment. This means investors must pay attention to their expected rental yield and factor in all costs when considering buying a home for rental purposes.
Another factor to consider is that there may be periods when your property is empty. This means that you may not receive the expected income for the year. You also need to be prepared for repair work and maintenance costs at your home. General maintenance costs are included in the rental yield calculations but you should look to have funds or access to funds in an emergency to ensure repair work or periods when the property is empty don’t cause great financial hardship.