Buy to Let property investments have stood up to the recent turbulence in financial markets and are a relatively safe way to invest. That said, it pays to do your homework before venturing into any financial investment and the Buy to Let market is no different. So, if you’re considering a Buy to Let property as an investment, here’s our step-by-step guide to Buy to Let Mortgages.
1. Find a suitable property you wish to buy and check you can afford it
When you have found a property that you are interested in investing in you’ll need to establish if you can finance the house purchase. Typically, larger deposits are required to secure finance in the Buy to Let market – the larger the deposit you can offer the better the mortgage deal you will get. You will need between 25% and 40% of the asking price to be accepted. Deposits below 25% are not likely to be accepted by lenders. A good mortgage deal is really important to the success (profitability) of you Buy to Let property investment.
2. Does it all add up?
Next, you’ll need to establish if the rental income you can achieve from the property will be enough to cover the mortgage payments. Most lenders will be looking for rents that are at least 125% of the monthly mortgage repayments.
To do this you’ll need to find an online mortgage calculator for buy to let mortgages. We’ve done the search for you – click here to get the Google search results. The results given by any of these calculators will only be a rough guide, but they will do for these purposes.
You’ll also need to check out the average rental costs for similar properties nearby. You can find this info on websites like Rightmove and Zoopla.
3. Search for the best deals online
Assuming your figures so far make the purchase of the property feasible, it’s time to start doing some searches online for the best deals you can find.
It’s useful to keep in mind that a Buy to Let mortgage is around 2% above the rates of a typical house purchase mortgage so don’t be too concerned if the deals you see don’t seem as competitive as the rate you pay on your personal mortgage.
Once you have made note of the best deals you can find based on the deposit you can afford it is time to move onto step 4.
4. Get some independent advice
In any mortgage application, it is advisable to get some professional advice from an independent mortgage advisor. Independent advisors can search for products across the whole of the mortgage market, not just those tied to one particular lender. They’ll also be able to work out the additional costs, such as arrangement fees, to establish which is the most competitive mortgage deal.
5. What’s in it for you?
An essential part of the process is to work out what you are going to get out of your investment – it’s not going to be worth doing unless you see a decent return.
The best measure of how much you’ll get out of your investment are the Gross Yield and Net Yield – they’re fairly straightforward to work out.
To find your Gross Yield take the full year’s rental income and divide it by the value of the property and express the result as a percentage. For example, £14,500 (annual rent income) / £180,000 (property value) = 8% Gross Yield.
To find your Net Yield you’ll need into account your costs. These will include the mortgage payments, Buildings insurance and Letting agency fees (if you use one).
In the example above, the monthly rent equates to approximately £1200. If your monthly costs are £700 that leaves £500 profit. Repeating the same calculation as we did for gross yield we get £6,000 (annual Net rent income) / £180,000 (property value) = 3% Net Yield.
6. Unexpected Costs
Before you approach a lender with your Buy to let mortgage application you should think how you would cope in a number of situations that would put you under financial stress.
Should you find that you are without a tenant in your property at any time, you will be required to meet the mortgage repayments from your other income. There are also other costs associated with being a landlord that you may not be aware of, such as repairs and safety checks.
You will be responsible for any repairs to or the replacement of major features of the house; the boiler and heating system for example.
You will also be required to carry out Landlord Gas and Electrical Safety Checks annually – these must be carried out by a qualified engineer. If you are using a letting agent to manage the property, find out if this is covered by their management fee or if it is a service they offer, but at additional cost.
7. Apply for your finance
Congratulations, you’ve made it through the last 6 steps and are ready to make your application for a buy to Let mortgage. As we mentioned in the introduction, there are many things to consider before taking on a Buy to Let Property Loan. Now you’ve read our guide you’ll have a better idea of what to expect and if you haven’t decided that it isn’t for you then it’s time to apply for you Buy to Let Mortgage.
If you are applying directly with a lender you should expect to be asked for documentation proving your income and that credit checks will be made.
If you are applying with the help of an independent mortgage advisor, make sure you choose one with specialist knowledge of the Buy to Let mortgage market. You will be guided through the application process by the mortgage advisor who will make sure that everything is in place before the application forms are sent off to minimise delay.
At Search Mortgage Solutions we specialise in advice to Buy to Let landlords and have expert knowledge of the best financial products on the market. Whether you are an existing landlord with a portfolio of one or more properties or you’re looking for your first Buy to Let Mortgage, call us free of charge on 0800 756 7794 for a preliminary phone chat with a member of our specialist Buy to Let team.