Buy to let mortgage query.

superclare

Hi Everyone, I was hoping to get some advice.

I am planning to move in with my partner next year. He owns his own house with a only small mortgage. I own my own home too but his is much nicer! I have around £60-70 000 equity in the house plus some savings. My partner and I are both keen to keep fiances separate so there are no plans for me to go on his mortgage or for us to buy somewhere else together. I really like the idea of still having a house that belongs to me and so had thought about renting my house out and trying to get consent to let. After looking into this although the rent would cover my mortgage there are areas nearby where I think I could get much more rent for the same value of the house. I am considering selling my house and buying a house on a buy to let mortgage. I guess that it would be better to have consent to let as I wouldn't have to worry about the consent to let running out, as I would likely to want to rent out long term.

What I was wondering is if I would be able to get a buy tolet mortgage

Although I have a mortage now I wouldn't have one after Isold my house. So I wouldn't be a first time buyer but I would probably sell my houseand move in with my partner before buying a new house rather than buy and sell at the same time.

I earn £32 000. I was also wondering what financial commitments a mortgage provider would take into account while working out how much I could borrow. I have a few things on interest free credit but could possibly pay them off before I buy again. I also have student loan. I would do a lot more research before definitely deciding what to do but just wondered if it would be an option at all.

Thank you in advance to everyone who take the time to reply.

dimbo61

Many Buy to let lenders want borrowers to have a residential mortgage and there own property! First problem.
Have a look on (This is money.co.uk)to see some of the problems with BTL landlords.
You also need a good income to cover any void periods and I think you should see if you can get Consent to let from your current lender first.
most allow up to 3 years on consent to let

superclare

dimbo61 wrote: »

Many Buy to let lenders want borrowers to have a residential mortgage and there own property! First problem.
Have a look on (This is money.co.uk)to see some of the problems with BTL landlords.
You also need a good income to cover any void periods and I think you should see if you can get Consent to let from your current lender first.
most allow up to 3 years on consent to let

Thank you very much for your advice. I will have good look at the this money website. Although I probably only have an average salary I am in a fortunate position that my partner has a small mortgage with low monthly payments and so only wants a contribution for the bills. As I have been paying my own mortgage without any problems I can't see there being too much of a problem if I had to pay the buy to let mortgage if it was empty.


If I did decide that I wanted to buy another house on a buy to let would there be options or would it be very hard/impossible without a residential mortgage?


Also if I was not able to get consent to let for my current house would it be any easier to change my current mortgage for that house to a buy to let?


Thank you

holly_hobby

Right ...

Well firstly as long as you have held a mge, which you do and will have, (ideally no longer than 12 mths pre application), you will be fine.

Minimum income is 25k with most lenders (but there a few whom don't have a min income requirement) ... so you are ok there too.

As a first time landlord, your max ltv will be 75% - so a minimum of 25% down as a deposit.

Affordability on a BTL mge is based on the rental income being 125% of the mge repayment (which may be interest only), using a ballpark 6% fig (lenders may choose to use the actual mge payrate esp if its a medium to long term fixed rate).

And as such your own commitments won't generally come into play - as the suitability is based on the business being self funding aka the above rental calculator.

Thats the easy bit ....

You will need to factor in legal, servicing and management costs, inc landlords blds ins (& contents too if affordable), emergency repairs and contingency funds (for periods of unoccupancy).

As a first time landlord, I would consider having a lettings mangement co run the show for the initial 12 mths, or until you feel confident in dealing with tenants and their issues directly.

You will need to submit an annual self assessment of your net (of permitted deductions) rental income to HMRC, whether a profit is generated or not. And you will be exposed to CGT on sale of the property, mitigated by permitted reliefs and allowances if it acts as your primary residence pre sale.

If you however keep you current property and primary residence, and choose to let it out, your exposure to CGT on its disposal, and the level of qualifying reliefs and allowances will be significantly different to that of a straight pch to let.

In purchasing a new property, you need to decide your target audience and desired returns carefully - do your research thorougly, ensure you choose a property in an area that (all things being equal) will have a bouyant demand by tenants, which will ensure that your rental levels and yield remain constant and healthy over time.

Lots to consider ....

Hope this helps

Holly

superclare

holly_hobby wrote: »

Right ...

Well firstly as long as you have held a mge, which you do and will have, (ideally no longer than 12 mths pre application), you will be fine.

Minimum income is 25k with most lenders (but there a few whom don't have a min income requirement) ... so you are ok there too.

As a first time landlord, your max ltv will be 75% - so a minimum of 25% down as a deposit.

Affordability on a BTL mge is based on the rental income being 125% of the mge repayment (which may be interest only), using a ballpark 6% fig (lenders may choose to use the actual mge payrate esp if its a medium to long term fixed rate).

And as such your own commitments won't generally come into play - as the suitability is based on the business being self funding aka the above rental calculator.

Thats the easy bit ....

You will need to factor in legal, servicing and management costs, inc landlords blds ins (& contents too if affordable), emergency repairs and contingency funds (for periods of unoccupancy).

As a first time landlord, I would consider having a lettings mangement co run the show for the initial 12 mths, or until you feel confident in dealing with tenants and their issues directly.

You will need to submit an annual self assessment of your net (of permitted deductions) rental income to HMRC, whether a profit is generated or not. And you will be exposed to CGT on sale of the property, mitigated by permitted reliefs and allowances if it acts as your primary residence pre sale.

If you however keep you current property and primary residence, and choose to let it out, your exposure to CGT on its disposal, and the level of qualifying reliefs and allowances will be significantly different to that of a straight pch to let.

In purchasing a new property, you need to decide your target audience and desired returns carefully - do your research thorougly, ensure you choose a property in an area that (all things being equal) will have a bouyant demand by tenants, which will ensure that your rental levels and yield remain constant and healthy over time.

Lots to consider ....

Hope this helps

Holly

Wow, thank you Holly! That definatley helps, I really appreicate you taking the time to provide all that information, it is a lot to think about! It is good to know that I would have options if I did want to do buy to let. But I will definately have to think about everything you have said and decide if it is worth the time and effort.

Could I just ask clarify something. If I got a interest only mortgage to ensure that the rent was 125% would I need a repayment vechicle? Also I would want the mortgage to be going down so I would want to overpay, would some of the products allow me to do that?

Thank you
Clare

holly_hobby

superclare wrote: »

Could I just ask clarify something. If I got a interest only mortgage to ensure that the rent was 125% would I need a repayment vechicle? Also I would want the mortgage to be going down so I would want to overpay, would some of the products allow me to do that?

Interest only mges currently remain permitted under BTL arrangements, with the rental income being 125% of that figure.

As regards a repayment vehicle, under current BTL new business criteira one isn't reqd, this is because BTLs don'tt come under FSA regulation, so are currently unaffected by the recent changes within the IO sector. Of course in the future lenders may implement their own requirements for evidence of a repayment vehicle - but at present none have accounced this.

With regards making lump sum reductions off the capital, sure ... there are BTL arrangements that will permit this (subject to their cited max annual reductions if the product chosen isn't penalty free). If you wish to withdraw the capital, it would be classed and processed as a further advance with the lender (unless a flexible/offset BTL mge arrangement was secured - which I don't think are currently available in the market) and capital withdrawal for HMRC and tax purposes.

From a business point of view, you need to be aware that one of the permitted deductions off gross rental income for tax purposes, is mortgage interset.

So, if you reduce the capital owing, you will obviously be charged less mge interest, and whilst this will increase your GROSS yield, it now becomes TAXABLE ..... that is why many BTL investors throw money at their own residential mge (which has no tax breaks), rather than using it to reduce any BTL borrowings - the benefit of it would essentially be down to your tax banding, to which if your are subject to HRT, then no personally I wouldn't make lump sum payments off the mge, but rather use the same capital in a more tax efficient manner (see below).

Of course, your intention in reducing the capital owed, may be to reduce your exposure to market down turns on selling - which is totally understandable.

Myself, and esp if HRT, I would instead of overpaying the mge with lump sums (and as you won't have your own residential mge), would be to instead salter away the monies in savings/deposit accounts (max out each yrs ISAs allowance firstly as they are tax free and low risk investments), then chose subsequent accounts for any further deposits in the tax yr that suit both your risk profile, access requirements, and have a decent net return (which will exceed any comparible net rental incoe, if you instead used monies os of your ISA allowance to reduce the mge borrowings).

This means that you achieve full tax mitigation on the mge (interest element), whilst receiving a return on the capital you have stored away ready to be thown in the mix, if you sell the property and its sale price is short of the os mge and assocaited fees.

A decent tax advisor will walk you through all this and give you further guidance on permitted deductions and how to operate the business to achieve max returns whilst mitigating tax exposure, whilst a whole of market mge broker, will source the most suitable BTL mge for your requirements and support you throughout the application process and beyond.

As a point, if you seek consent to let (which is a voluntary agreement of the lender) - and you are currently on a repayment mge, your lender may not permit a full switch to IO if they agree to the let - unless exceptional circs (ie payment difficulties).

And as touched on in an earlier post, CTL is timebound to a period of circa 3 yrs - although some lenders do have a shorter permission period - at which point they will transfer you onto a BTL mge, or you will need to source one from an alternative provider.

Hope this helps

Holly

superclare

holly_hobby wrote: »

Interest only mges currently remain permitted under BTL arrangements, with the rental income being 125% of that figure.

As regards a repayment vehicle, under current BTL new business criteira one isn't reqd, this is because BTLs don'tt come under FSA regulation, so are currently unaffected by the recent changes within the IO sector. Of course in the future lenders may implement their own requirements for evidence of a repayment vehicle - but at present none have accounced this.

With regards making lump sum reductions off the capital, sure ... there are BTL arrangements that will permit this (subject to their cited max annual reductions if the product chosen isn't penalty free). If you wish to withdraw the capital, it would be classed and processed as a further advance with the lender (unless a flexible/offset BTL mge arrangement was secured - which I don't think are currently available in the market) and capital withdrawal for HMRC and tax purposes.

From a business point of view, you need to be aware that one of the permitted deductions off gross rental income for tax purposes, is mortgage interset.

So, if you reduce the capital owing, you will obviously be charged less mge interest, and whilst this will increase your GROSS yield, it now becomes TAXABLE ..... that is why many BTL investors throw money at their own residential mge (which has no tax breaks), rather than using it to reduce any BTL borrowings - the benefit of it would essentially be down to your tax banding, to which if your are subject to HRT, then no personally I wouldn't make lump sum payments off the mge, but rather use the same capital in a more tax efficient manner (see below).

Of course, your intention in reducing the capital owed, may be to reduce your exposure to market down turns on selling - which is totally understandable.

Myself, and esp if HRT, I would instead of overpaying the mge with lump sums (and as you won't have your own residential mge), would be to instead salter away the monies in savings/deposit accounts (max out each yrs ISAs allowance firstly as they are tax free and low risk investments), then chose subsequent accounts for any further deposits in the tax yr that suit both your risk profile, access requirements, and have a decent net return (which will exceed any comparible net rental incoe, if you instead used monies os of your ISA allowance to reduce the mge borrowings).

This means that you achieve full tax mitigation on the mge (interest element), whilst receiving a return on the capital you have stored away ready to be thown in the mix, if you sell the property and its sale price is short of the os mge and assocaited fees.

A decent tax advisor will walk you through all this and give you further guidance on permitted deductions and how to operate the business to achieve max returns whilst mitigating tax exposure, whilst a whole of market mge broker, will source the most suitable BTL mge for your requirements and support you throughout the application process and beyond.

As a point, if you seek consent to let (which is a voluntary agreement of the lender) - and you are currently on a repayment mge, your lender may not permit a full switch to IO if they agree to the let - unless exceptional circs (ie payment difficulties).

And as touched on in an earlier post, CTL is timebound to a period of circa 3 yrs - although some lenders do have a shorter permission period - at which point they will transfer you onto a BTL mge, or you will need to source one from an alternative provider.

Hope this helps

Holly

Thank you again, that's very comprehensive and really useful advice!! If I did go ahead I would definatley use a broker, tax advisor and a company to manage the rental. One last question, how would I find out how much rent I could get for a house that I was interestead in and what proof would the lender be happy with . I guess you can't really arrange tenants before you have actually bought the house!

holly_hobby

superclare wrote: »

Thank you again, that's very comprehensive and really useful advice!! If I did go ahead I would definatley use a broker, tax advisor and a company to manage the rental. One last question, how would I find out how much rent I could get for a house that I was interestead in and what proof would the lender be happy with . I guess you can't really arrange tenants before you have actually bought the house!

You visit local estate/letting agents in the chosen area, tell them what you are looking to pch and ask for ballpark rents, what demand is like etc - then make a decision as to whether the return is worth hassel and having some of your capital tied up over the duration (ie the reqd min 25% deposit).

The lender asks the surveyor as part of the propety survey, to also confirm the likely achieveable rental income for the property (to which he too will usually contact local agts for comparibles).

Hope this helps

Holly

superclare

holly_hobby wrote: »

You visit local estate/letting agents in the chosen area, tell them what you are looking to pch and ask for ballpark rents, what demand is like etc - then make a decision as to whether the return is worth hassel and having some of your capital tied up over the duration (ie the reqd min 25% deposit).

The lender asks the surveyor as part of the propety survey, to also confirm the likely achieveable rental income for the property (to which he too will usually contact local agts for comparibles).

Hope this helps

Holly

Thank you Holly, you're a star! :beer:

Conrad

holly_hobby wrote: »

Right ...

Well firstly as long as you have held a mge, which you do and will have, (ideally no longer than 12 mths pre application), you will be fine.




Holly

The OP cannot simply sell hers in favour of a B2L as lenders expect landlords to retain and own a main residence, otherwise people that cannot get a normal resi mortgage, would use B2L as a way around the rules. TMW for example are now going after brokers that have been using B2L as a way to get around residential mortgage rules.

Furthermore, B2L lenders are now carrying out sense tests now, which I think is worth a mention here in a thread on B2L. This means lenders are now looking out specifically for people using B2L in place of a resi mortgage (OP I realise this does not apply to you btw).

holly_hobby

Yes I agree Conrad, but in this case her main residence will be her partners , so no the implemented stress test won't affect her (presuming she can prove her reisdency if reqd).

I'm both aware of and don't dispute TMW criteria, indeed Kensington have the same stance (classing a non-resi mge holder as a FTB, which they don't accept), but although the main, they certainly aren't the only BTL lenders in the market.

Indeed taking Ipswich BS as one example, their current critera states applicants must own or HAVE owned their own property (although I am aware that advisers os of IBS geographical paramaters may not necessarily be aware of their criteria) - which may avoid the sale and delayed pch issue evidenced with the BTL lenders mentioned above (if she elects not to pursue CTL on her current home).

For ref ....
http://www.ibs.co.uk/mortgages/mortgages-products/buy-to-let-mortgages

Glad to see you've also changed you view on BTLs being used as a back door resi - and that the lenders are now up the mark on the manipulation of the arrangement which is long over due to be honest.

Hope this helps

Holly