My First Property

What Is The Criteria For A Buy-to-Let Mortgage?

Buy-to-let mortgages make investing in property more affordable. If you are looking to start building a property portfolio, it is important to find out whether you meet the criteria for a buy-to-let mortgage.

While buy-to-let mortgages are very similar to standard mortgages, there are some differences to be aware of. We have put together this guide to help you determine whether you qualify for a buy-to-let mortgage, along with some other things to bear in mind when doing so.

Who Qualifies for a Buy-to-Let Mortgage?

If you meet the following criteria, you are more likely to qualify for a buy-to-let mortgage:

1) You want to invest in property

The most important thing to remember with buy-to-let mortgages is that your property is an investment. When you purchase the property, you are effectively setting up a small business. It may sound obvious, but you will only qualify for a buy-to-let mortgage if you actually intend to rent out the property.

2) You can afford to take the risks of investing

Buying property to rent out is not without risk. We will talk more about this later, but you must make sure that you are in a suitable financial position to make such an investment. Ensure you have a financial cushion to help you out if things go wrong.

3) You already own your own home

In order to commit to buying a property to rent out, you must be able to demonstrate that you own your own home first. However, this does not mean you must have paid off your mortgage. If you have an active mortgage, this still counts as owning your home.

4) You have a good credit record

As with all methods of borrowing money, whether it be a mortgage or a payday loan, you must be able to show a good credit score. You must not be overstretched with other repayments such as credit cards or finance purchases.

5) You earn £25,000 + per year

£25,000 tends to be the standard minimum income for those who qualify for a buy-to-let mortgage. If you earn less than this, you might struggle to find a lender who will approve your application.

6) You fall into the age limits allowed by the lender

As a standard criteria across lenders (even for standard mortgages) you may find it difficult to secure an offer if you are older than a certain age. This age is applicable to when the mortgage ends, so if you are between 70 and 75 when the mortgage is set to end, you may struggle. For instance, if you take out a 30 year mortgage when you are 43, you will be 73 when it ends.

How Do Buy-to-Let Mortgages Work?

A buy-to-let mortgage is designed (as the name suggests) to purchase a property with the intention of renting it out. It is a common method of investment in the UK, as it offers landlords a tangible asset that offers two potential means of income. The two methods of income are as follows:

Rental Income - The rent fees paid by the tenants, minus maintenance costs and letting agency fees

Property Value Growth - The profit earned from selling the property at an increased value from when you bought it

Of course, both of these are risks with investing in a buy-to-let mortgage. If the current rental climate allows, you may be able to charge more in rent than what the mortgage costs to repay. This is the ideal end goal when buying to let.

Sometimes, the stars can align and both of these avenues can bring in a good return. However, there is a risk that either one may not go the way you expect.

Risks Involved in Buying to Let

There are a number of risks involved in getting a buy-to-let mortgage. You must ensure that you can weather these risks before taking out the mortgage.

1) Rent-paying tenants are not guaranteed

Just because your property is available for rent, does not mean that tenants are guaranteed. There may be months between tenants where rental yield does not cover the mortgage costs, and you will have to pay for things yourself.

While you can assign a lettings agency to advertise your property, this also comes at a cost. This is more likely to attract tenants, coupled with good property presentation and landlord guarantees.

2) Rent is not dictated by you

The amount of rent you can charge your tenants is not a figure that you can set. Rates are dictated by wider market trends, location of the property, property size and the appliances and amenities the property offers.

To combat this, we advise researching heavily into the type and location of the property that you wish to buy. This will help you better forecast what your rental charges are likely to be.

3) The value of the property may fall

While property value tends to increase over time due to demand, but this is not written in stone. Wider economic climates may cause property prices to fall, or local price trends may also affect value. Therefore, you may not be able to sell it on for as high a price as you wanted.

Depending on when you want to see a return, we recommend timing the sale of the property with property market growth.

4) You may have to dip into your own savings

If your rental yield does not cover the costs of the mortgage due to external factors, you may have to use your own funds. Buying to let does not always pay for itself, especially if there are unexpected costs that spring up over time.

It is always worth budgeting to ensure you have money available to pay for costs. Also, we recommend laying down some conditions for your tenants when it comes to maintenance costs. If damages are caused by the tenants, then perhaps they should pay.

5) Repairs may bring unexpected costs

It is never pleasant when your tenants call you with an urgent repair. Whether it be the boiler, the appliances or a broken piece of furniture, it is likely you will have to pay for it yourself.

We recommend putting aside a portion of your rental income each month, and building up a bed of cash for this very purpose. This will ensure you are less likely to be caught off guard with costs you cannot afford.

6) Good tenants are not guaranteed

Just because you manage to land some tenants, does not mean they will be good tenants. You may end up with unclean, disorganised, unreliable tenants that are a drag on your property. They may continually miss rental payments, or cause damage to the property that they are unable to pay for.

We recommend heavily vetting your tenants before you sign the rental agreement. Ask for references from previous landlords, and ask to see proof of income. These are standards that are usually required when signing for a property.

Benefits of Buying to Let

If you can meet these risks without there being a major danger to your financial wellbeing, buying to let can bring plenty of return. These include;

1) Monthly income from rent

When you have reliable tenants who agreed to rent the property for an agreed amount of time, you can rely on monthly income. If you are able to charge fees higher than the cost of the mortgage, you will turn a small profit each month while having your mortgage paid off for you.

2) Property grows in value

If your property does indeed grow in value, you will be able to sell it for more than you paid for it. Flipping properties like this can be a very profitable business, and many people do it for a living. Also, the higher the value of a property, the bigger the demand is for renting it. This means that you will be entitled to charge more in rent, which is a win win scenario.

3) Expand your property portfolio

Once you own and manage one property, it is easier to grow a property portfolio from there. Not only will you be learning the ropes of being a landlord, but if you are profitable, you have the makings of a prosperous investment portfolio.

4) A more tangible investment

Property is a far more tangible investment than stocks and shares, as it gives you a physical asset that you can see. Plus, property prices fluctuate less than stocks and shares, and are more likely to retain their value over time due to demand.

Final Things to Bear in Mind

If you meet the criteria for a buy-to-let mortgage, then there are a few things to consider before going ahead.

1) You will need landlords insurance and buildings insurance

If you want your investment to be secure, landlord insurance can protect the value of your investment in the event of loss of rental income or liability issues. It is also worth insuring the bricks and mortar with building insurance, just as you would with your own home.

2) There are taxes involved in buying to let

Being a landlord - just as most other methods of earning money - is taxable. Your rental income is taxed by the government, as is the purchase of the home with stamp duty land tax.

From the 6th of April 2020, tax relief for landlord finance costs are restricted to the basic income tax rate of 20%, which helps. For properties being leased during the 2018 to 2019 tax year, landlords with buy-to-let mortgages can offset 50% of their mortgage against rental income.

3) Your money is tied up

When you invest in property, the money you invest is not able to be taken out like you would with a bank account. Your investment is tied up in the property, and can only be taken back in the event of a sale or a remortgage. If you are happy to sit on a long term investment, property is one of the best.

4) Standard property purchase fees still apply

When processing a buy-to-let mortgage, all the fees you would have to pay for standard mortgages still apply. These include solicitor fees, mortgage advisor commission, homebuyer surveys and stamp duty.

5) You pay tax if your capital grows

Thanks to something called capital gains tax, any profit you make from selling a buy-to-let property is taxable. This is worth taking into account when choosing a property, as ideally the value of the property would grow enough to still generate a profit you can take home.

6) The investment takes time

Finally, it is worth bearing in mind that any investment takes time. Many things dictate how long a buy-to-let investment will take to pay off, such as rental income and speed of value increase. Most landlords expect their property investments to stand for many years before they pay out.

More first-time house buying articles:

  1. How Much Does a House Survey Cost?
  2. How Does Interest on a Mortgage Work?
  3. Buying Your First Home In London
  4. Decorating Your First Home: 10 Budget-Friendly Tips
  5. Tips on Viewing Properties

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