If you’re thinking about getting into the property business and would like to try your hand at being a landlord, there are a few ways to do this. You can remortgage and change your mortgage into a buy to let or you could remortgage your property to release money to buy a new property.
Here we explain everything you need to know about remortgaging to a buy to let mortgage.
It’s very common to remortgage to buy to let. This is generally done if you live in a residential property and want to change it to a buy-to-let property.
If you’re moving away, for example, and you want to rent out your property or you’ve moved in with a partner and you want to keep your property and rent it out.
To do this you’ll need to remortgage to buy to let because you usually can’t rent out a property if you have a standard residential mortgage.
If you’ve got money in a savings account at the moment, you’re likely to have seen the interest rate drop. This is because the Bank of England’s Monetary Policy Committee (MPC) has kept rates historically low at 0.1% as a reaction to the economic consequences of the coronavirus outbreak.
With the outlook for savings rates so dire, one way you may look to boost your income is to get into the property market. While this does not come without its risks, which we explain below, with house prices and rent remaining high it could be an option.
You’ll usually need a deposit of between 30% and 40% of the property price to qualify for a buy-to-let mortgage. Most of the market-leading deals require at least 40% and if you don’t have this money to hand, remortgaging might be a way to release it from your existing property.
You may be remortgaging to a buy-to-let mortgage which means you’ll just have one buy-to-let mortgage to pay off, although if it’s rented out the rent should pay your mortgage.
However, if the buy-to-let property is a second property, you may end up with two mortgages.
Buy-to-let mortgages tend to be more expensive than residential mortgages so it’s worth comparing the cost of both and factoring in all the extra costs.
We’ve already explained that taking out a buy-to-let mortgage might be a little harder than a residential mortgage, but what other costs need to be factored in? If you are buying a second property it’s not just the mortgage deposit but the following costs also need to be accounted for.
The only way you’d be able to avoid paying mortgage fees is if you don’t need one and could buy your second property outright. In all other instances there will be hefty mortgage fees, as there are when buying any kind of property.
When you are looking for a new mortgage, all the extra fees should be listed so you can see how much you will have to pay. If you’re in a fixed rate mortgage deal on your current property and you’re looking to remortgage and end this deal early, there may be an early repayment fee.
When you purchase a buy-to-let property and rent it out, you may need to pay fees including letting fees to an agency. A letting agent can find tenants and manage a tenancy but this comes with extra charges, usually an upfront fee and then a monthly charge.
You have to pay stamp duty, or SDLT as it’s known, on most properties in the UK. To work out exactly how much extra this will be, a free stamp duty calculator can show you how much you’ll need to pay.
There’s also extra stamp duty to pay on second homes or some buy-to-let properties of 3% on anything bought for £40,000 or more. This doesn’t apply to caravans, houseboats, or motorhomes.
If you’re renting out your property you’ll need to factor in the costs of keeping it in a good condition. This includes paying out for white goods if they break, such as a fridge or freezer, but also the general upkeep such as plumbing work or painting.
When looking at savings rates, it’s clear to see why buy-to-let properties can seem like an attractive option. However, they aren’t suitable for everyone and there’s also no guarantee you’ll make money on one.
You’ll also need to be prepared that if for some reasons you weren’t able to get tenants into the property, you’d be left paying the mortgage.
As with residential mortgages, there’s a few options to choose from when it comes to buy-to-let mortgages. Once you’ve decided on the kind of mortgage, you then need to decide which provider to go with.
It’s up to you whether you apply directly to a lender or you go to a mortgage broker, but with each option before you go ahead always calculate how much you’re going to end up paying.
Here are the main types of mortgage to choose from.
A fixed rate mortgage does what it says on the tin, the amount you pay is fixed over the term of the mortgage until you have paid it off.
If you choose a variable rate mortgage the amount you pay follows the standard variable rate (SVR) which is set by the provider and based on the Bank of England base rate. This means the price could go up or down within the term of the mortgage. Currently the base rate is at a historic low of 0.1% in relation to the economic consequences of the coronavirus outbreak but there’s no guarantee it will stay this way.
In a similar way to a variable rate mortgage, a tracker is linked to the base rate and could go up or down during the term of the mortgage.
You’ll only pay the interest with one of these mortgages making your monthly repayments cheaper than most mortgages. However, you’ll need to pay a lump sum off the mortgage when the deal comes to an end.
Even if you’re sticking with your current mortgage lender, rates on buy-to-let mortgages are usually higher than they are with residential mortgages.
Lenders see you as a bigger risk because if something were to happen which meant you didn't have paying tenants, you would have to make the repayments. Therefore you’ll need to prove to the lender you can make these payments, either through your income or savings.
The bigger deposit you have to put in, the better the buy-to-let mortgage rates you'll be offered.
You'll also have a better chance of being offered a competitive rate if you've got a good credit history and don't have a lot of debt.
To boost your chances of getting a decent mortgage there are a few things you can look at.
You’ll need enough money to pay for at least 25% of the cost of the buy-to-let property, or closer to 40% if you want one of the best deals around.
Lenders are stricter with buy-to-let mortgages so to give yourself the best chance possible make sure you’re keeping an eye on debt and paying off anything you can.
The better your credit score, the better the deals you can access. There’s lots of ways to improve your credit score from joining the Electoral Roll to closing credit cards you’re not using.
If you own a buy-to-let property and your mortgage is coming to an end, you’ll need to remortgage unless you own the property outright.
In the same way as remortgaging with a residential property the first step is to see how much you need to borrow and then to look at the kind of rates and offers available.
A buy-to-let mortgage calculator is a good place to start and will give you an idea of the kind of mortgages you’ll be likely to apply for, and how much they will cost you.