How Do Buy to Let Mortgages Work? | Londonmoneyman

How Do Buy to Let Mortgages in London Work?

The Financial Conduct Authority does not regulate some types of commercial or buy to let mortgages in London.

When it comes to the world of mortgages, there are many different routes that a property purchaser can take. From first time home buyers making their first steps onto the property ladder, to homeowners remortgaging, as well as holiday lets and even HMO’s, there’s a lot you can achieve!

One particular mortgage area that we frequently encounter when we speak to customers, is for a buy to let mortgage in London.

What is a buy to let purchase and mortgage in London?

A buy to let in London will be classed as an investment property; You are prohibited from personally residing in it, it is solely there for profit. If you have privately rented previously, you will have likely been living in a property with a buy to let mortgage attached to it.

In order for a property to count as a buy to let in London, it has to be intentionally mortgaged as such, with the landlord making clear their plans to rent it out. The tenant will pay a monthly rental cost, that should be able to cover the monthly mortgage costs, plus a little more.

Am I eligible for a buy to let mortgage in London?

There are a lot of different areas that you can look at, to figure out whether or not you are eligible for taking out a buy to let mortgage in London.

Some of these factors can include what type of property it is that you are looking to buy, how old you are (there will typically be a limit of between 21 and 75, with mortgage lenders who work past 75 for a buy to let in London being limited), as well as your buy to let landlord experience.

The biggest factors that will be looked at by a mortgage lender are your affordability, the minimum deposit requirements and the current status of your credit score.

Affordability

So that you can prove order to prove your eligibility for taking out a buy to let mortgage in London, you must first prove your affordability to the mortgage lender. The vast majority of mortgage lenders will have their basis for this centered around your projected rental income.

Projected rental income is the amount that your mortgage lender feels you should charge in rent, in order to cover all of your monthly mortgage payments, plus additional funds. They will have a specific requirement for this, and the mortgage lender will calculate it using the properties value.

As well as using what they deem is the projected rental income, some buy to let mortgage lenders will also have their own minimum income requirement, which is typically around £25,000, though this is entirely dependent on the mortgage lender you will be borrowing from.

An expert mortgage broker in London with experience in working with buy to let mortgages in London, such as our team here at Londonmoneyman, will help you find the most suitable mortgage lender for your plans and on the most suitable mortgage deal.

Minimum Required Deposit

As will generally be standard with most purchases, you must put down a deposit for your buy to let mortgage in London. Typically speaking, the minimum for this is around 20-25% of the value of the property, though this can differ depending on your mortgage lender.

This is so that the mortgage lender has a reduced risk. By having a much higher deposit, you’re borrowing less funds against your property. This in turn will open you up to between a 75-80% loan to value, which gives you access to much better interest rates.

If you do fall into the category of a high risk purchase, say if you’re looking to take out a buy to let mortgage in London with bad credit, you may be asked to put down a deposit that is even higher than that.

Credit Score

You may be eligible for taking out a buy to let mortgage in London if you have a low credit score or a history of bad credit, though your choice of mortgage lenders will be greatly reduced. There are plenty out there, who may not even lend at all to someone with bad credit.

For the mortgage lenders who are still willing to help customers in these kinds of situations, they will be looking at factors such as, how serious your bad credit actually is and why it is that way. You may also be required to put down a bigger deposit.

How do I apply for a buy to let mortgage in London?

Before you make an application for a buy to let mortgage in London, you will of course first need to find a property you would even like to make a purchase on.

Once you have done that, book a free mortgage appointment and speak with an expert buy to let mortgage advisor in London, as they can confirm whether or not you are eligible, find the best deals out there for you, and find you a mortgage agreement in principle.

Following this stage, you will have the freedom to go and make an offer on that property, which will kickstart your full mortgage application process, providing you have had your offer accepted.

What type of buy to let mortgage in London could I apply for?

As a general rule, you will find that buy to let mortgage investors will take out their buy to let in London as an interest only mortgage. This means you only pay the interest per month, drastically lowering your monthly outgoings.

Once your term has reached its conclusion, you will owe the capital balance that remains. This is usually either paid off by selling the property or taking out a remortgage and moving it onto a repayment mortgage. You may also be required to set up a repayment vehicle, in order to cover the cost.

Whilst an interest only mortgage tends to be the more tax-efficient and popular of the mortgage types for a buy to let in London, you are still also able to take out repayment mortgages on your properties. This means you will be paying a combination of capital and interest per month.

Though this of course will increase your monthly mortgage payments, it will mean that equity can grow within your property. At the end of your term, you would own your property outright, without the need to make any capital payments back to the mortgage lender.

How much can I borrow for a buy to let mortgage in London?

As mentioned previously, a mortgage lender will want to stress-test your projected rental income, to review the amount you need to be charging in rent, so that you are able to cover the cost of your monthly mortgage repayments.

In terms of the amount that you would like to borrow, as long as your projected income can cover the amount that you are asking for, you will typically not be limited. That being said, a mortgage lender will want to see your projected rental income is more than your monthly payments by a certain amount.

What documents are needed for a buy to let mortgage in London?

For you to be able to apply for a buy to let mortgage in London, you will also need to give your mortgage lender a selection of documents, before you proceed. These usually include, proof of your income, deposit, ID, address, any bonuses and commission, as well as your current or most recent P60.

If you are a self employed mortgage applicant, you will generally need to provide your SA302 tax returns. Existing landlords may also be required to give proof of rental income, which usually comes in the form of an ARLA-regulated report, as well as a mortgage statement of all your existing properties.

By making sure you have as much of this with you as you can, ahead of taking out a buy to let mortgage in London, you will find that your mortgage application progresses much quicker than it otherwise would have. It is definitely within your best interests!

Are there any additional costs included with a buy to let in London?

Of course, much like there would be with any mortgage, you will have basic costs involved. You will obviously need to put down a deposit, so that is a larger cost. Then there are mortgage arrangement fees, application and broker fees, as well as monthly mortgage payment costs.

On top of this, you may also have other fees that you will need to pay. Some of the more frequently encountered fees you will have to pay, include valuation fees, product fees and mortgage exit fees. Additionally, there may be solicitors fees and disbursement fees, as well as stamp duty.

Your open & honest mortgage advisor in London will be able to provide more accurate advice on the potential stamp duty rates you will be paying. If you ever wish to exit your buy to let in London early, you may have to pay an early repayment charge (ERC), which may be quite expensive.

Lastly, you will have to think about the types of costs that will go beyond what you would be already paying. Landlord insurance is also something that you will have to think about, as well as any letting agent fees, income tax and the general upkeep of the property, such as making repairs.

All the different costs included with a buy to let mortgage in London can be different, depending on mortgage lender, as well as your own personal and financial situation. Not all of these will be factored, though your mortgage advisor in London will make sure you are aware of every cost involved.

Can I remortgage a buy to let in London?

Yes, you will almost always be able to remortgage a buy to let in London. We typically see landlords looking to take out a buy to let remortgage in London as a way of releasing equity from the property, with the intention of putting a deposit down on another property.

The equity that is in your buy to let property will work a little differently than a standard residential property, if you currently have an interest only mortgage. Normally your balance and the interest will come down together, creating a much larger gap between value and balance.

When you have an interest only buy to let in London, only the interest will decrease. That means the equity in your property depends on how much deposit you put down and what the value of the property now is. Speaking of interest only mortgage, you may wish to also pay the capital balance as well.

To achieve this, you would be remortgaging your interest only buy to let mortgage in London onto a repayment mortgage, which would increase your monthly mortgage payments but give you the option of paying both capital and interest at the same time.

If I am a first time buyer, can I get a buy to let mortgage in London?

Though you may have limited options, it may actually be possible to get a buy to let mortgage in London as a first time buyer in London. When you look at first time buyer buy to let mortgage options, your deposit will likely need to be bigger, so that you can borrow the amount you need.

Additionally, please also bear in mind that in doing this, you would lose out on other benefits that first time buyers would get, such as stamp duty, because it is not a main residence for you and generally, buy to let landlords will be paying stamp duty.

For many first time buyers in London, becoming a landlord can actually be a really useful way to give a boost to your income, prior to affording a mortgage of your own on a residential property that you would like to live in.

Always remember that in situations like these, a mortgage lender will assess you on your second purchase, knowing that you already have a mortgage to your name, which in turn could affect future affordability or reduce how much you could borrow.


Last edited 09/11/2022

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