Most people who have purchased their own home will be familiar with the concept of a mortgage. However, as homeowners increasingly look to invest in other properties and shore up their financial assets in doing so, many are now coming into contact with types of mortgage that they didn’t even know existed.
Taking out a second mortgage to cover the costs of investing in a buy to let property is a perfectly valid way of securing the funding that you need, but it is not an approach without its own pitfalls. Before you make any kind of financial commitment, you should first make sure that you understand exactly what you are letting yourself in for.
Here’s what you need to know about using mortgages to fund the purchase of a buy to let property. If you have already taken out a mortgage on your primary residence, then you will already understand the basic procedure, but there are some important differences to be aware of when you are pursuing a mortgage to pay for a buy to let property.
How a Buy to Let Mortgage Mortgage Works
For any landlord who wants to purchase a property for the purposes of renting it out, a buy to let mortgage is an ideal solution. The rules surrounding buy to let mortgages mirror those of regular mortgages, although there are some important differences that should be noted.
You can only apply for a buy to let mortgage under certain circumstances. They are available to applicants that satisfy the following circumstances:
- They are looking to invest in houses or flats.
- The applicant understands the financial obligations that they are taking on when they invest in property.
- They already own their own home, even if there is an outstanding mortgage on the property.
- Their credit score is high, and they aren’t currently in excessive debt.
- Their earnings are above £25,000 a year. For people earning less than this, it is more difficult to get approved by a lender.
- They are below a certain age. While the exact number varies from lender to lender, most have an upper age limit of between 70 and 75. If you are older than this when you apply, then you are more likely to be rejected.
While the basic principles of a buy to let mortgage are the same as a regular mortgage, there are some important differences between the two that should be noted. First of all, the fees associated with a buy to let mortgage are often higher than they are for a regular mortgage. Similarly, the interest rates tend to be higher for buy to let mortgages.
Most buy to let mortgages will also require a deposit of 25%, although this averages anywhere between 20 and 40% and will vary from lender to lender. The majority of BTL mortgages are also interest-only, meaning that borrowers will only pay interest each month and don’t have to worry about capital payments.
One final important note to make before you apply for a BTL mortgage is that they aren’t regulated by the Financial Conduct Authority. This means that, in many cases, you won’t be entitled to the same financial protection that other borrowers are. However, there are exceptions to this. For example, if you are looking to let out the property to a close family member, then the mortgage will be assessed according to the same criteria as regular residential mortgages.
Converting a Residential Mortgage to Buy To Let Stamp Duty
Many people want to switch from a residential mortgage to a buy to let alternative. There are numerous scenarios in which makes this switch makes sense. For example, a lender who is moving home or has an empty house that is currently under a residential mortgage might want to change their existing mortgage to a buy to let alternative. If you already have a residential mortgage on your property and you want to convert it to a buy to let mortgage, then you will need to obtain consent from your existing lender. Your lender is not obligated to say yes, and they may deny your request. If you are denied, then you might want to consider remortgaging as an option instead.
Before you commit yourself to making the switch from a regular mortgage to a buy to let option, you need to make sure that you understand the implications of doing so, and you are able to afford it financially. If at all possible, you should consult with a specialist advisor beforehand, someone who has a good working knowledge of mortgages and can help you navigate the path ahead.
Buy to let mortgages work differently from regular residential mortgages. If you are looking to maximise the amount of income that you are able to earn through rent, for example, a buy to let mortgage is a much better option.
A Joint Mortgage With Parents Calculator
For any younger home buyers whose parents have a decent amount of equity tied up in their existing properties, their parents might be able to act as guarantors on a mortgage. Having a parent act as a guarantor on a mortgage means that if the child is unable to make their scheduled repayments, then the guarantor, in this case, the parents, will step in and assume responsibility for the payment.
Before deciding whether to agree to the loan or not, a lender will first assess the income of everyone involved. Even if you have a guarantor co-signing your mortgage, lenders will still want to be reasonably confident that you are going to be able to make the payments as scheduled. There is a wide range of mortgage calculators available online that will give you an idea as to whether your application is likely to be successful or not.
Finding The Best Mortgage Rates UK
Taking the time to shop around when looking at mortgages will enable you to ensure that you are getting the best rate possible. Spending even just a little bit of time going through the options available to you and comparing them can end up saving you hundreds of pounds every month, and potentially thousands of pounds over the course of a single year.
But before you can start comparing mortgages to find the best rate available for you, you need to know exactly what kind of mortgage it is that you are looking for. For example, there are both interest-only mortgages and repayment mortgages available, as well as those that offer a fixed rate and those that offer a variable rate.
While the rate of a mortgage is obviously a very important consideration, it is not the only thing that you need to consider. For example, you also need to consider whether you have the cash on hand to cover the various solicitors’ fees, stamp duty, and other costs associated with a mortgage.
What Is The Stamp Duty On A Remortgage
Many people are concerned about the potential costs of remortgaging because they are afraid of the costs of stamp duty. However, the stamp duty tax is only applicable when there is a transfer of the legal title of a home. Unless your remortgage involves transferring ownership of your home to someone else, you won’t have to pay ay stamp duty on the transaction.
Taking out a 2nd Home Mortgage
Second home mortgages are commonly used by homeowners who are looking to purchase a buy to let property to add to their portfolio. When taking out a second home mortgage, you can use any equity that you have tied up in your current home as security against your second mortgage. Of course, you need to be prepared for the impacts of having two mortgages on the same property.
The amount you are able to borrow for your second mortgage will depend on the equity of your current property and how much of your previous mortgage has already been paid off.
Is Stamp Duty Payable on a Remortgage?
Stamp duty is not payable on a remortgage unless you transfer the title of the property into a new name, and this transfer is part of the transaction.
Can You Add Stamp Duty To A Mortgage?
Yes, you can add stamp duty to a mortgage. However, before you do this, you need to make sure that you understand the implications. Taking this route will incur additional interest charges that you would otherwise be able to avoid. For landlords purchasing a second home to use as a buy to let property, there is an additional second home stamp duty charge that needs to be paid.
Anyone purchasing a second or additional property on top of their primary residence has to pay an increased rate of stamp duty tax.
Many people turn to property investments to try and improve their financial security, buying a buy to let property is a popular route to take. However, while a buy to let property can be a solid investment, it is essential that landlords understand exactly what they are getting into and what their obligations are before they commit themselves to the purchase of a second property. Never apply for a mortgage until you are satisfied that you know exactly what it entails.