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An Introduction to Buy To Let and Let To Buy Mortgages

  • August 10, 2023

Entering the world of Buy To Let (BTL) property? Let’s break down the essentials of Buy To Let mortgages, the option of Let To Buy, and how best to structure your property ownership, along with understanding the crucial aspects of investor yield.

Piles of coins getting taller with a woodern toy green house sitting on top of each pile

Buy To Let Mortgages ExplainednA Buy To Let mortgage is designed for those purchasing property to rent out. Unlike regular mortgages, lenders assess your eligibility based on potential rental income, but your personal income also factors in.

Typically, a BTL mortgage requires a deposit between 20-40% of the property’s value. Although interest rates can be higher than residential mortgages, strategic investments can make the returns well worth it.

Let To Buy Mortgages – A Brief Overview.nMoving but wishing to keep and rent your current home? A Let To Buy mortgage is your solution. It transforms your existing home into a BTL while you secure a new residential mortgag on a new home.

Often the purchase of the new home and changing your current property onto a Let To Buy mortgage needs to take place at the same time, but some lenders are more flexible.

Why lenders prefer you to own the home you live in

One significant factor that many lenders consider is whether the aspiring landlord already owns their own home. But why is this important?

The primary reason is to prevent what is colloquially termed as ‘backdoor’ Buy To Lets. In such scenarios, an individual might secure a Buy To Let mortgage with the apparent intention to rent out the property but instead move into the house themselves. This goes against the terms of a BTL mortgage, as it is designed and priced considering the risks and rewards of a property being let out.

By ensuring that the landlord already has their own residential property, lenders believe that the chances of such ‘backdoor’ moves are substantially reduced. It acts as a reassurance that the borrower is genuinely entering the market as a landlord and not merely trying to sidestep the more stringent criteria and potentially higher rates associated with residential mortgages.

Thus, owning your home can not only boost your credibility in the eyes of the lender but also streamline the mortgage application process

Ownership Decisions: Personal or Company?nShould you own the property personally or via a limited company?

    1. Personal Ownership: Previously, most landlords chose this route. Rental income was personal, with tax based on individual rates. However, recent tax relief changes mean higher earners might find this method less beneficial.
    1. Limited Company: A rising trend is the use of limited companies for property. While profits face corporation rates, these rates can be beneficial. However, securing a BTL mortgage under a company can be trickier and may come with higher rates.

Interest-Only Tip: Most BTL mortgages are interest-only. This keeps repayments low, handling only the interest. It’s a safety net for unforeseen tenant issues, ensuring manageable payments and avoiding potential personal financial strain.

Calculating Yield Tip – The Significance of Investor YieldnWhile many investors majorly focus on rental yield, the more substantial gains often emerge from capital growth. To fully grasp your returns, you need to consider the Net Yield – a combination of rental yield and capital growth yield.

For instance, if you have a property that has a rental yield of 5% and a capital growth of 3%, the Net Yield would be 8%.

For those in a leveraged position, the gains can be even more substantial. If you’ve put down a 25% deposit, the capital growth yield on your investment is effectively quadrupled. So, a property seeing 3% growth in price actually results in a 12% return on your deposit. Combined with the 5% rental yield, your leveraged Net Yield would be a whopping 17%.

However dont forget this also works against you if there is a drop in the property price !!

Seeking the Right Mortgage BrokernA good broker can be invaluable. Beyond online searches, platforms like Unbiased and VouchedFor give genuine broker insights. A top tip: ask potential brokers if they would allow you to chat with their recent clients. Brokers with a solid local track record can often offer unmatched local insights and reliability. It may also be worth asking if the broker has any Buy To Lets themselves as they may be able to share some useful insights into being a BTL landlord.

In conclusion, BTL investments demand thorough understanding and meticulous planning. Being well-versed with the intricacies of mortgages and the dynamics of yields can set you on a path to success. Seeking professional guidance is always a wise decision.

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Your home is at risk if you fail to keep up payments on your mortgage or any other loans secured against it. Buy to Let mortgages are not usually regulated by the Financial Conduct Authority.

Compton Financial Services Ltd is an Appointed Representative of New Leaf Distribution Ltd. who are authorised and regulated by the Financial Conduct Authority. Number 460421. Head Office 165 – 167 High Street, Rayleigh, Essex SS6 7QA. Co registration Number 5520001.