Mortgages

Mortgages

Mortgages

Buying a property can be a confusing experience whether you are just starting out on the property ladder or expanding your property portfolio, getting the right mortgage can make a huge difference to your returns.

Most investors spread their capital over several properties and do so via finance, but you should explore how much your property is going to cost and ensure that you can afford the monthly payments.

The most common way to purchase an investment property is with a buy-to-let mortgage which is a loan designed for investors who intend to lease their property out to a tenant rather that occupy it for self-usage. These mortgages often require larger deposits, and the interest rates and arrangement fees are slightly higher than those of a standard residential mortgage as they carry a greater risk for the lender.

With Buy-to-let mortgages, UK residents at present you can borrow up to 75% of the property purchase price. How much you can borrow is going to depend upon what rental income you’re likely to achieve. Most lenders will look for an interest cover ratio (ICR) of 125%, meaning your rental income must be 125% of your mortgage payments. Some may impose higher levels, of around 145%, particularly if you are a higher rate taxpayer.

Example:

Mortgage

£100,000

Interest rate @ 5%

£5,000

Lending criteria

125%

Annual rent required (£5k x 125%)

£6,250

Monthly required £6,250÷12

£520

 

If you are looking to purchase one or two properties to top up your pension then it may be preferable to go to a bank but if you are buying multiple properties for a larger portfolio you should speak with a mortgage broker or specialist lender, your accountant will also advise you of the best option to choose.

What are the typical requirements?

A residential mortgage will require a 5-10% of the value of the property as a deposit, most buy-to-let loans will require at least 25%. The maximum loan-to-value most lenders will consider is 75%. Loan to Value (LTV) is the amount of mortgage expressed as a percentage of the value of the property or purchase price, whichever is lower. For example, a mortgage of £80,000 on a purchase price of £100,000 would be 80% LTV. If the valuation of the property is lower than the price you've agreed on, the LTV will be based on the valuation.

Unlike with a residential mortgage, lenders are less interested in your salary than the expected income from the property. That said, some lenders will require you to earn at least £25,000 aside from your rental income.

What types of buy-to-let mortgages are available?

You can choose to pay either interest only or capital repayment.

  • Interest-only mortgage -mortgages where you only pay the lender the interest payments for a fixed term.
  • Capital repayment mortgage - a capital repayment mortgage allows the investor to repay the value of the loan plus the interest over a fixed term.

It’s always advisable to get an Approval in Principle (AIP) before committing to buying your property, if you are looking to obtain finance further down the line and if purchasing an off-plan property. An AIP indicates how much you could borrow based on the information you have provided, it performs various criteria and credit reference agency checks, and gives a conditional decision to lend based on its findings.

What if I’m not a UK resident?

You do not need to be live in the UK to get a buy-to-let mortgage and purchase UK property although foreign nationals must undergo stringent money laundering checks. These checks are on the investor’s identity, place of residence and where the funds are coming from for the lender to offset as much risk as possible.

The investor will be required to put a larger deposit down and the arrangement fee and interest fee will be slightly higher than a UK resident.

If you have any questions or would like to speak to a specialist advisor, please contact us


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