This week blog looks at what you need to know when considering a buy to let as an investment property.
If you are new to Buy to let; which is buying a property to rent out, you may not be aware of what deposit you need; and how they are assessed. Buy to let’s are not a property you are going to live in. it is a property you are buying to rent out to tenants.
Read on to find out more…
People often ask us:
“is our personal income taken into account with a buy to let mortgage?”
The answer is: With buy to let mortgages, it is the rent that is paying the mortgage each month. How your income is factored in, is that the majority of UK lenders will require you to have a minimum of £25,000 salary per year. This is because lenders do not like taking too much risk. Additionally, most will want to ensure you can afford the mortgage repayments in situations like, rental voids or if the property is not tenanted. If you do earn less than £25,000 per year, there are lenders who could still consider your application. If you want to fit the majority and have access to a greater amount of lenders, you need to be earning over £25,000 per year.
Are Buy to Let different to Residential mortgage assessment?
Buy to Let properties are assessed differently to a residential mortgage. When buying a residential property, the minimum deposit you need is 5%. With buy to let, typically you will need a minimum 25% deposit but it may be possible with 15%-20%. When talking smaller deposits, the choice of lenders will be limited. In addition, it will also be dependent on the rental income received as to whether it supports the remaining 75% or 80% – 85% buy to let mortgage borrowing.
The maximum amount you can borrow for this type of mortgage is dependent on how much you can rent the property for. Typically, mortgage lenders will want to see the rent is significantly higher than the declared monthly repayment. The exact amount depends on your individual tax status. Higher rate tax payers will need to evidence higher rental income because of the increased tax payable.
Buy to Let rental calculations
Buy to let lenders will have an ICR calculation (Interest Coverage Ratio) based on an interest rate (let’s say 5.5% for illustrative purposes) and a percentage coverage.
Lower rate tax payers need a minimum of 125% coverage. Higher Rate Tax-payers approximately 145% coverage
Let’s use a real life example:
Mortgage = £200,000 Interest calculated at 5.5%
A basic rate taxpayer would need the property to rent for a minimum of £1,146 per month. A higher rate taxpayer would need the property to rent for a minimum of £1,330 per month
If you are renting the property for less than the average calculations above, there may be options for you.
Because of the comprehensive range of mortgage lenders out there they all have their own criteria and perhaps more favourable calculations or even top-slicing. By this we mean, some lenders have lower calculations of the 5.5% interest rate or a lower ICR so you may not need as much rental income.
Top slicing is whereby a mortgage lender uses the borrower’s personal income to top up any shortfall in rent. As these examples are generalised and does not constitute finance advice; nor take into account your circumstances, it would be prudent to seek professional guidance on what the best buy to let options are for you.
If you wish to discuss buy to lets further and to make sure you are adequately prepared to invest, then you can contact us on the channels below:
If you missed last week’s blog, you can catch up on How to take the headache out of credit reports here.
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