Are you considering turning your home into a buy to let rental property?
Perhaps you’re moving to a new city for work, or you’ve inherited a property and want to make the most of it. Whatever your reason, changing your residential mortgage to a buy to let arrangement can be a good financial move.
However, it’s not a decision to be taken lightly. This guide will walk you through everything you need to know about making the switch.
Understanding the Basics
Before jumping into the process of changing your mortgage, it’s important to understand what you’re getting into.
A buy to let mortgage is fundamentally different from a residential mortgage, and these differences will impact your financial situation and responsibilities.
What is a Buy to Let Mortgage?
A buy to let mortgage is a specific type of loan designed for property investors who intend to rent out their properties.
Unlike residential mortgages, which are based on your personal income, buy to let mortgages are primarily assessed on the potential rental income of the property. This means that the property itself becomes the main factor in determining your eligibility for the loan.
These mortgages typically require a larger deposit, often 25% or more of the property’s value, compared to residential mortgages. They also tend to have higher interest rates to reflect the increased risk to lenders.
Key Differences Between Residential and Buy to Let Mortgages
The most notable difference is in how lenders assess affordability.
With a buy to let mortgage, lenders typically require the rental income to be 125-145% of the mortgage payments (interest only). This higher threshold provides a buffer against potential void periods when the property might be unoccupied.
Another key difference lies in the repayment structure.
Most buy to let mortgages are set up as interest-only, which means you only pay the interest each month, not the capital. This results in lower monthly payments, but you’ll need a plan to repay the capital at the end of the mortgage term.
Reasons for Switching to a Buy to Let Mortgage
People consider switching to a buy to let mortgage for various reasons, each with its own set of considerations.
Moving to a New Property
If you’re buying a new home but want to keep your current property as an investment, switching to a buy to let mortgage can be an excellent option. This scenario, often called “let to buy“, allows you to release equity from your current home to use as a deposit on your new property while turning your old home into a rental.
Relocating for Work or Travel
For those facing a temporary relocation, perhaps for work or extended travel, changing to a buy to let mortgage can provide a way to retain your property while generating income to cover the mortgage payments.
This can be particularly attractive if you plan to return to the property in the future.
Financial Considerations
In some cases, switching to a buy to let mortgage is driven by financial necessity.
For instance, if you’re struggling to meet your current mortgage payments, renting out your property could provide additional income to cover these costs. However, it’s crucial to carefully consider the financial implications and responsibilities that come with being a landlord before making this decision.
Options for Changing Your Mortgage
When it comes to changing your mortgage to accommodate letting your property, you have two main options: obtaining consent to let or remortgaging to a buy to let product.
Consent to Let
Consent to let is a temporary permission granted by your current lender to rent out your property while keeping your existing residential mortgage. This option is typically suitable for short-term arrangements, usually lasting 6-12 months. It’s worth noting that some lenders may charge an administration fee or increase your interest rate if they grant consent to let.
Read more: What is consent to let and when is it needed?
Remortgaging to a Buy to Let Product
For a longer-term solution, remortgaging to a dedicated buy to let product is often the best choice.
This involves either switching to a buy to let mortgage with your current lender or moving to a new lender altogether. While this process is more involved than obtaining consent to let, it provides a more permanent solution and can often result in more favourable terms for landlords.
Eligibility Criteria for Buy to Let Mortgages
Securing a buy to let mortgage isn’t always straightforward. Lenders have specific criteria that you’ll need to meet to be eligible for this type of loan.
Property Requirements
Most lenders require a minimum property value, typically around £50,000-£75,000.
The property should also be in good habitable condition and suitable for letting straight away. Some lenders may have restrictions on certain types of properties, such as ex-council houses or high-rise flats.
Financial Considerations
Your personal financial situation plays an important role in mortgage eligibility.
Many lenders require a minimum income, often around £25,000 per year, separate from any potential rental income. They’ll also look at your credit history and any existing debts.
The loan-to-value (LTV) ratio is another important factor. Buy to let mortgages typically require a larger deposit than residential mortgages, with most lenders offering a maximum LTV of 75-80%. This means you’ll need at least a 20-25% deposit or equivalent equity in your property.
Landlord Experience
Some lenders prefer to work with experienced landlords, while others are open to first-time landlords.
If you’re new to property letting, you may find that your options are somewhat limited, or you might face slightly higher interest rates.
The Process of Switching
Changing your mortgage isn’t a decision to be taken lightly.
It requires careful planning and consideration of your current circumstances. Here’s a step-by-step guide to the process:
- Assess your current mortgage: Review your existing mortgage terms. Check if you’re still within an initial fixed or discounted rate period, as leaving early could result in significant early repayment charges.
- Research lenders and products: Explore your options. Different lenders offer varying rates, terms, and criteria for buy to let mortgages. Look beyond your current lender to ensure you’re getting the best deal.
- Property valuation: Most lenders will require a recent valuation of your property to determine how much they’re willing to lend.
- Gather necessary documents: You’ll need to provide proof of income, details about the property, and projected rental income.
- Submit your application: Once you’ve chosen a lender and product, submit your application along with all required documentation.
- Property assessment: The lender will conduct their own assessment of the property to ensure it meets their criteria for a buy to let mortgage, this will also assess the rent.
- Offer and completion: If your application is successful, the lender will make you a mortgage offer. Once you accept, the legal process of switching your mortgage can begin.
Financial Implications of Switching
Changing to a buy to let mortgage can have significant financial implications that extend beyond the mortgage itself.
Costs Involved in Remortgaging
Switching your mortgage isn’t free. You may face arrangement fees, valuation fees, and legal fees. If you’re exiting your current mortgage early, you might also need to pay early repayment charges. You need to factor these costs into your calculations when deciding whether switching is financially viable.
Potential Tax Considerations
Becoming a landlord also has tax implications.
Rental income is taxable, and the way mortgage interest is treated for tax purposes has changed in recent years. Full mortgage interest relief has been replaced by a 20% tax credit. This change may increase your tax liability, especially if you’re a higher or additional rate taxpayer.
For this reason many landlords have been using a limited company to own their properties, circumventing the mortgage interest relief problem. For this you will need an SPV Mortgage.
You may also be liable for additional stamp duty if you’re keeping your current property as a buy to let while purchasing a new home to live in. Capital gains tax may apply when you eventually sell the property. It’s advisable to consult with a tax professional to understand how these changes might affect you.
Preparing Your Property for Rental
Once you’ve secured your buy to let mortgage, you’ll need to prepare your property for tenants.
Legal Requirements
As a landlord, you have legal obligations to ensure your property is safe and habitable. This includes:
- Obtaining an Energy Performance Certificate (EPC)
- Ensuring all gas and electrical equipment is safely installed and maintained
- Providing smoke alarms and carbon monoxide detectors
- Protecting your tenant’s deposit in a government-approved scheme
- Conducting right to rent checks on your tenants
Practical Considerations
Beyond the legal requirements, consider what will make your property attractive to potential tenants. This might include:
- Decorating to a neutral standard
- Ensuring all appliances are in good working order
- Deciding whether to offer the property furnished or unfurnished
- Considering the local rental market and what tenants in your area are looking for
- Getting appropriate landlord insurance
Alternatives to Switching Your Mortgage
While changing to a buy to let mortgage is a popular option, it’s not the only choice available if you’re looking to rent out your property.
Consent to Let for Short-Term Letting
If you only plan to rent out your property for a short period, perhaps while working away or travelling, consent to let might be a more suitable option. This allows you to keep your existing residential mortgage while renting out your property for a limited time.
If agreeable, most lenders will allow a maximum of 12 months.
Let to Buy Mortgages
If you’re planning to buy a new home to live in while renting out your current property, a let to buy arrangement might be worth considering.
This involves remortgaging your current home onto a buy to let mortgage and taking out a new residential mortgage on your new home, often completed as part of the same transaction.
The Role of Mortgage Brokers
At Drake Mortgages, we have been involved in the buy to let mortgage market since its inception.
As experienced independent brokers, we offer expert advice and access to a wide range of mortgage products, including some not available directly to consumers.
Our in-depth knowledge of the market allows us to provide current and relevant advice, particularly valuable in the buy to let sector where lending criteria can be more stringent.
We’ll help you understand the different types of buy to let mortgages, explaining the pros and cons of each to suit your investment strategy.
We compare rates and terms from multiple lenders, saving you time and potentially protecting your credit score by avoiding multiple applications. Our team assists with every step of the application process, from gathering documents to liaising with lenders on your behalf.
Most importantly, we advise on the most suitable mortgage for your circumstances, considering your investment goals, financial situation, and risk tolerance.
As an FCA-regulated broker with extensive experience in buy to let mortgages, we’re committed to helping you make the best decision for your property investment journey.
Is Changing to a Buy to Let Mortgage Right for You?
Changing your mortgage to a buy to let can be a smart financial move in the right circumstances.
It can provide additional income, help you retain a property you’re not currently living in, and potentially offer long-term investment gains. However, it’s not without its challenges and responsibilities.
Before making the switch, carefully consider your motivations, financial situation, and long-term goals. What works for one person may not be the best choice for another.
Contact us today to discuss how we can help you transition from your residential mortgage to a suitable buy-to-let mortgage product.