Mortgage Finance – A guide for Landlords
19th January 2015
If you are looking to buy a property as an investment, build up a large portfolio or simply looking to retain the property you currently own while moving to a new property, we are one of the most experienced brokerages in London to help you with this.
A common mistake many first-time landlords make is to jump in with both feet and take the first available mortgage option they see. In this arena it is all about successful forward planning and different lenders and products will be more suitable dependent on your long-term aims.
Whether this is to grow a portfolio, to obtain short-term capital growth or long-term income supplement, it is important to weigh up all the options with an independent professional. Low rates may seem attractive, but a plethora of fees and reversion rates can come back to bite.
We are also seeing more and more professional landlords with large portfolios coming to us to unlock equity and begin to buy once more. In this area, having the knowledge of all lenders in the market, as well as some more interesting lenders who are not publically available, can make all the difference.
Here we look at 10 points to bear in mind when looking at finance on a property to be rented out.
01: First Steps
Buy To Let mortgages have become increasingly competitive, but still complex with a bewildering array of choices. Some will offer low rates but come with large percentage fees and often those products that have slightly higher rates and lower fees may be more suitable. We strongly recommend that even before going to look for a property you come and talk to us so we can take you through the various options.
02: Finding The Property
Unlike looking for a property for you to live in, you need to remove emotion and consider the investment potential of the property. Below are some key considerations you should think about:-
1) Rental Income – most lenders require the rent to exceed the monthly mortgage payments, on an interest only basis, by 125% per month at an assumed rate of around 5%
2) Objectives – is the property to bolster your income, or for longer term growth, or both? There may also be some tax aspects you will need to consider.
3) Take your Estate Agents advice as to property type and location.
03: Get your documentation in order
A Buy-To-Let mortgage is similar to the processing of a residential mortgage so it is important to make sure your documentation is in order. Lenders like to see your last three years address history, (no gaps), your last three months payslips and last P60 or three years accounts, your last three months bank statements and full details of any loans or credit cards you have. Providing this information on day one can speed up the process no end.
04: Are you creditworthy?
All lenders want to make sure they are lending money to someone who is highly likely to pay it back. We can carry out this check for you, or you can go on-line and some companies will offer you a check for free or a free trial of their services. Simple things like paying all your credit cards on time and making sure you are on the voters roll at your current address will help.
05: How much can I borrow?
As the property you are looking to buy is an investment, the amount of rental income you achieve is vitally important. Lenders generally require the rental income to exceed the monthly mortgage payments (on an interest only basis) by around 125% per month, often at an assumed rate of around 5%.
This is based on the gross rental income from the property to be purchased or remortgaged.
There are some options available where you can use your income to top up any shortfall on the lenders rental requirements, but you must consider the viability of this as a long term investment.
06: Let To Buy
Remortgaging your existing property on to an official Buy to Let or Rent to Buy Scheme is a good option for some, as this could enable you to release some much needed equity in your current property to use as a deposit for your new home.
Lenders will assess the borrowing capacity not on your current income, but on the rental income that can be achieved, which is then put through a specific formula. For example the gross rental income on your existing property must equal 125% of the interest only mortgage payments at the mortgage pay rate.
This cover does vary from lender to lender so it is important to speak to an expert who understands all the small print.
07: Being a Landlord
Whilst being a landlord can be highly profitable it brings with it responsibilities both to maintain property and its equipment. It also brings with it the responsibility to comply with a plethora of rules and regulations. Your Estate Agents comprehensive lettings and management service can deal with these on your behalf.
You should also prepare for the possibility of the odd void period. Suddenly having to pay two mortgages may be a stretch so it is a good idea to have at least 3 to 6 months mortgage payments in an emergency account just in case.
There are also a plethora of rules and regulations a landlord should know, so make sure you do your homework and know what you are liable for.
08: Building a Portfolio
For more experienced landlords, or if you have a large property portfolio, actively managing your portfolio to ensure you have the right rate on each property, or are able to gear up and release equity for future purchases is of vital importance when looking to grow.
It may be possible to agree a credit line or facility for you to buy additional properties quickly and cheaply, making the most of rental and capital growth opportunities.
09: Development Opportunities
For landlords with portfolios of a certain size, the line often blurs between residential investment and commercial financing, whether it is developing a site, converting a property into flats or even building from scratch.
Getting the right advice, finance and advice in this area of the market is just as critical and can often mean the difference between turning a healthy profit or not.
10: Complex Requirements & Large Loans
Many of our clients have a need for more bespoke lending and there is no financing too big or complex for us to handle. We are well versed with assisting with multi-million pound transactions and have advisers on hand with years of experience in this arena.
The Coreco Group are a leading, London-based provider of independent mortgage advice. We specialise in all types of mortgages and are experts in First Time Buyer loans and Large Mortgage Loans. As genuinely independent mortgage professionals, providing a highly personal service, Coreco are here to help you to own and protect your home.
Business such as residential and buy to let mortgages in the UK are provided through Coreco Partners LLP, other business such as commercial financing is provided through Coreco Commercial Limited and is not regulated by the Financial Conduct Authority.
There is no guarantee that it will be possible to arrange continuous letting of the property, nor that rental income will be sufficient to meet the cost of the mortgage.
Your home may be repossessed if you do not keep up repayments on your mortgage.
A fee of up to 1% of the mortgage amount may be charged depending on individual circumstances. A typical fee is £495.
This is Bow, he’s a plucky little Boston Terrier and knows a thing about mortgage applications. His owner, Patrick, is one of our clients and Bow here helps with his paperwork. If there’s anything you need to know about mortgage applications or the paperwork entailed then check out our advice hub – it has everything you need!View the mortgage guides
Andrew Montlake, Director and Spokesperson for Coreco, gives his honest and forthright views on the mortgage market, economy and all things property related. Monty was voted "Mortgage Personality of the year 2008", "Best Press Spokesperson" in 2011 and is the current holder of the British Mortgage Awards “Best Marketeer” title. Expect expert analysis, delivered in a down to earth style with a side helping of exuberance.