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Ian Symmonds from Easy Street talks about Changing a Residential Mortgage to a Buy to Let in the latest Mortgage & Protection Podcast
Can I switch my residential mortgage to a buy-to-let?
This is potentially possible, but it will depend on a few key factors.
Firstly, the amount of equity is important for a buy to let mortgage. Generally speaking, most buy to let lenders require a minimum of 25% equity in the property. There are currently some lenders who will consider 20%, but the rates will tend to be higher and the criteria may be more strict.
Another consideration which ties in with equity, is whether you have any early repayment charges with your existing residential mortgage. If so and you are not planning to port (transfer) the mortgage to another property, this needs to be factored in. If you don’t have the funds to cover any penalties, this may need to be raised on the mortgage which puts more pressure on the loan to value limit.
Other key things to consider with buy to let mortgages are the potential rental amount and the rental demand for your property. These points are very important to a lender as the idea with buy to let is that it’s the rental income that will service the monthly mortgage payment, not your personal income. Each lender will also have their own way of calculating how much rent will be needed to get the loan amount required so this may differ depending on who you speak to.
Following on from this, your personal income may still be a consideration with lenders. Some have minimum income requirements, for example £20k – £25k per annum, to ensure that you can cover void period and general expenses for a short time if required.
Furthermore, you also need to make sure that your financial affairs are in order. Lenders will still assess your individual circumstances to make sure that they feel you are credit worthy and carry out the necessary credit checks.
Finally, just because you can switch your residential mortgage to a buy to let, it doesn’t necessarily mean you should. Buy to let as an investment isn’t right for everyone. You need to make sure you properly consider all of the potential risks as well as the rewards before moving forward to make sure that it’s the right approach for you.
How does it work? What is the process? Is it easy to change to a buy to let mortgage?
Remortgaging an existing residential mortgage to a buy to let is a very similar process to a standard remortgage. You will find the product that best suits your needs, request an agreement in principle, submit an application and then the mortgage offer will be subject to underwriting and survey. After this, the legal work is carried out and the legal charge is switched over on completion.
The key differences will be the underwriting and survey. Generally speaking, affordability by way of earned income isn’t as much of a concern with buy to let as it is with residential mortgages. However, lenders may need to see proof of income and it may need to meet need to meet a minimum amount. If you own other buy to let properties in the background, the lender may need to take this into account, particularly if you own more than 4 as you would be classed as a portfolio landlord. With regards to the survey, not only will the lender be asking for a property valuation, but also a rental valuation as well. This is the figure that they will use in determining how much they will be prepared to lend, taking into account their criteria and stress test.
What happens if you don’t change your mortgage to a buy-to-let?
If you keep your residential mortgage and let the property without changing to a buy to let mortgage or requesting a consent to let, it is highly likely that you will be in breach of your mortgage contract.
If you are planning to let your property and it has a residential mortgage on it, you should check the terms of your mortgage offer and speak with your existing lender to see if they are happy with this and if so, on what basis.
Is it illegal to rent a house on a residential mortgage? Do I need to tell my mortgage lender if I let my property?
Generally speaking, residential mortgage contracts will have clauses in them that state that the property is not allowed to be let out without the permission of the lender.
In simple terms, this means that if you let your property out with a residential mortgage secured against it and without the permission of the lender, it is highly likely that you may be in breach of contract which could be seen as mortgage fraud.
In fairness, some people may not be aware that this is the case and may feel that as long as the mortgage payments are being made, is shouldn’t make a difference. However, in order for everything to be legal and above board, you should always contact your lender to make sure that you are always adhering to the terms of your mortgage contract and therefore avoid any potential issues.
Furthermore, it’s likely that any insurance on the property may be invalid if you are letting the property out without permission or a suitable mortgage in place. You would need to check the insurance policy to confirm the situation and take out a landlord insurance policy if required.
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Is a Buy to Let mortgage more expensive?
Generally, buy to let mortgages tend to be more expensive than residential mortgages when it comes to interest rates.
The reason for this is that they are classed as higher risk. The perception is that a tenant may pose a higher risk of missing a rental payment for a property they don’t own, compared to a homeowner missing a mortgage payment for a property they do own. In addition, if a tenant fails to make a payment which puts financial pressure on the homeowner, is the owner more likely to cover the cost of their residential mortgage or the buy to let mortgage if they had to make the choice? These are the sort of considerations that could pose a higher risk of buy to let mortgage payments being missed.
Furthermore, there could be an argument that a tenant isn’t as motivated to keep the property in as good a condition as an owner occupier which may adversely affect the value. Of course this is not always the case. In many cases, tenants will actually manage their finances and their property far better than the home owner. However, lenders will tend to err on the side of caution when it comes to risk, pricing and equity requirements and this is why buy to let mortgages tend to me more expensive than residential, owner occupier mortgages.
What is consent to let?
In simple terms, consent to let is having permission from a lender to let out a property that has a residential mortgage on it.
Depending on the lender, there may be certain criteria that needs to be met. For example, you may need to have been with them a certain amount of time, have a certain amount of equity in the property or the estimated rental needs to cover the mortgage payment by a certain amount. The lender will usually also need you to have a good payment history with them.
Assuming any criteria is met, it usually involves a reasonably straight forward application process. Depending on the lender, there may be costs such as a small admin fee, an increase in the interest rate payable or further lender fees.
It’s important to note that consent to let should be viewed as a short term solution. The lender may insist on reviewing the consent to let regularly, for example every 12-24 months. In addition, at the end of any benefit period, in most cases the lender is unlikely to offer another residential interest rate to transfer on to. This means that it’s likely that you would either stay on the lender’s standard variable rate or remortgage on to a buy to let product, most likely with another provider.
How quickly can you get consent to let?
Consent to let doesn’t usually require any further underwriting. It’s usually dependent on certain qualifying criteria being met which means it can potentially be a quick process.
In terms of when you can apply, lenders will usually need you to be with them for a certain amount time, for example 6 – 12 months.
How soon can you remortgage to a buy-to-let?
You can remortgage to a buy to let at any time, however you would need to consider any early repayment charges on an existing mortgage. This is one of the main reasons people explore consent to let in the first instance.
In terms of how long the remortgage process takes, this will be dependent on each individual person, the lender selected and the solicitor instructed. However, on average, the process usually takes between 2 – 3 months.
How much deposit do you need for a buy-to-let?/ How much can I borrow?
The minimum deposit or equity amount required for a buy to let at the moment is 20%. However, usually if you have a 25% deposit, you may find that rates may be more competitive and criteria may be more generous.
An important point to note here is that the rental income is usually key to buy to let mortgages. So even though you have the minimum deposit required, you need to double check that the estimated rental income meets the lender’s criteria with regards to achieving the loan amount required.
Do you pay stamp duty on a Buy to Let?
If you are remortgaging on to a buy to let product, in most cases there is no further stamp duty to pay. If you are adding or removing somebody, there may be additional stamp duty to pay, but you would need to speak to a solicitor or tax adviser to confirm this.
If you are purchasing a buy to let property, in most cases there will be stamp duty to pay and in most cases, this will include a stamp duty levy. This means that the stamp duty could be higher than expected so you need to check this with a solicitor or tax adviser when doing your calculations.
Further fees could include –
Lender Arrangement Fees
Letting agent Fee
How can a mortgage broker help?
In terms of moving a residential mortgage to a buy to let, a specialist mortgage broker will help you decide whether it’s the right thing to do and if so, the most suitable way to do it. This will include considering your existing mortgage and comparing it to buy to let providers from across the market.
If consent to let looks like the right approach, a good broker will also consider the exit strategy for when the consent to let expires or the existing benefit period comes to an end.