Buy To Let Part 3 - Finding the right mortgage
You own a house, you've had several mortgages, you know how it works. Sorting out a loan on a buy to let property is much the same, right?
Sorry, no. It's like comparing rugby league to rugby union. The pitch and goalposts might look pretty similar, but getting a mortgage on a rental property is a whole different ballgame.
We are on to Part 3 of our buy to let series and this time we are going to tell you how to get the loan that is right for you.
Our professional guide is Tina Hayton-Banks, Head of Customer Services for NMS (Nottingham Mortgage Services) - a subsidiary of The Nottingham - which offers advice to would-be landlords and searches the whole of the mortgage market to find them the best mortgage deals.
Are you an owner-occupier? You need a yes to that question before going any further. Lenders will want to see you have a track record in making home-loan repayments before considering you for a Buy to Let mortgage, says Tina.
The next thing to bear in mind is that the vast majority of Buy to Let mortgages are interest-only, rather than interest and capital repayment mortgages. An interest-only mortgage means you only pay the interest on the loan. At the end of the mortgage term, you can sell the property, re-mortgage or use invested rental income from the property to pay back the capital part of the loan.
New MMR (Mortgage Market Review) rules - designed to ensure borrowers are not loaned more than they can afford - do not apply to Buy to Let mortgages. That doesn't mean lenders are free and easy with their money. If anything, they are more cautious.
Most lenders have minimum salary requirements and age restrictions on Buy to Let mortgages. They want to be reassured you have the means to make mortgage repayments if you have a few months without a tenant in your property or things don't go entirely to plan.
"See it from a lender's perspective," says Tina. "If you ran into financial difficulties which mortgage would you carry on paying: the one on your own home or the one on your rental property?
"The lender wants to make sure you can afford the repayments now and if interest rates rise."
Valuers used by mortgage companies don't just assess the value of a buy to let property (to make sure the home is worth the loan), they also calculate its expected rental income.
The amount of rent it brings per month usually needs to be 25% higher than the monthly repayments on its mortgage (£625 rent against a £500 mortgage repayment, for example).
Lenders have other rules you need to be aware of.
Some banks and building societies don't offer buy-to-let mortgages on flats or properties with elements of commercial use. Some will not lend on shared and multiple occupancy properties and some where the tenants are family members.
Fees on buy-to-let mortgages also tend to be higher.
"Some fees are quite hefty. You can pay up to £2,000 for a product," says Tina. "Its rates might be lower, but is it worth the fee? You might be better off with a product with a lower fee and a slightly higher rate. Those are the things you need to consider."
Advisers from NMS are aware of the different qualifying and affordability criteria applied by different lenders. Tina strongly advises would-be landlords to make use of that free, professional expertise.
"We will search the whole-of-market to help the borrower find what they are looking for," says Tina. "It won't necessarily be the cheapest rate, but it will be the overall best deal based on their circumstances and rental property."
Read our series of buy to let stories