In 2018, more than 5 million households in the UK were rented from private landlords, representing around 20% of the population. In London, the number is up to nearly 30%. Unless you own your property outright, qualifying for a mortgage is the easiest way to purchase a property to get it ready for rentals.
What is necessary to obtain a mortgage? Are there specific mortgages designed for landlords? Let’s look at the requirements to obtain a mortgage in the UK as a landlord and what resources might be available to help you reach that goal.
Obtaining a Mortgage as a Home Buyer
There are many steps to consider if you’re shopping for a mortgage to buy your first home or a new home. Lenders take a close look at your collective household income, including salaries and any income you bring in from freelance or gig work, to determine if you can afford a mortgage.
They will require that you bring a variety of documents when processing your application, which could include but aren’t limited to:
- Utility bills
- A P60 form from your employer
- Driver’s license, passport, or other government-issued identification
- Bank statements for three to six months
- Tax forms, such as form SA302 for self-employment
- Proof of any additional benefits or income received
A lender will take all of this information into consideration. They may also perform what is known as a stress test to determine whether you would be able to afford your mortgage payments if there are significant changes in your life, such as losing a job or having a child.
There are many different mortgages to choose from, each with requirements and criteria. These more traditional mortgages are generally only available to those looking to buy a home as their residence. If you’re looking to get a mortgage to purchase a home to rent, the details can change significantly.
Obtaining a Mortgage as a Landlord
Getting a mortgage to create a rental property is known as a buy-to-let mortgage in the UK. Many of the steps are similar for obtaining this type of mortgage, but there are some variables you may need to consider. Buy-to-let mortgages are typically only available to those who:
- Already own their own home.
- Have a good credit record.
- Don’t have too much debt.
- Earn more than £25,000 annually.
- Are below a specific age threshold.
- Wants to invest in houses or flats.
- Understands the risks that come with creating a rental property.
It sounds simple enough, but there are many risks and additional expenses to consider that we’ll discuss more in detail in a moment.
The fees for these mortgages tend to be a lot higher than more traditional lending. Down payments and minimum deposits are often higher – between 20-40%. Buy-to-let mortgages are often interest-only, meaning you’re only making payments on the interest, not the principle. Once the loan period ends, you’re required to repay the entire amount of the loan in full.
Age plays a significant role in qualifications for these types of mortgages. Most have an upper age limit that you can’t exceed at the end of the loan. If you’re in your 40s and taking out a 25-year mortgage, you’ll be in your 60s or 70s by the time the loan period is complete. Many lenders set an upper age limit of 70 or 75, so keep that in mind as you’re shopping for mortgages.
The amount of money you can borrow on a buy-to-let mortgage is directly related to the rent you expect to make monthly on these properties. To qualify, the monthly rental income usually needs to be 25-30% higher than your expected mortgage payment.
Mortgages Are Getting Harder to Come By
Borrowing to rent is becoming increasingly challenging in the UK. Banks are slowing down lending or reducing the amount of money landlords can borrow in response to worries about a cost of living crisis and rental arrears. Lenders are tightening their belts, reducing the amount that landlords can borrow relative to the amount of rental income they bring in.
One mortgage broker working for Private Finance reported in May that a landlord bringing in £1,000 monthly in rental income would see potential loan amounts drop by almost 9%, from £206,000 to £188,000. Metro Bank has dropped its loans even further, reducing potential mortgages by 12%.
This lack of mortgage availability isn’t limited to landlords or the United Kingdom. Rent prices are climbing in London, with demand far outpacing supply, and making it more difficult for people to find places to live in the city.
Hiring a Mortgage Broker
While it is possible to walk into a bank and apply for a buy-to-let mortgage on your own, there are so many variables to consider that it’s easy to make a mistake or overlook something important that could disqualify you from obtaining a mortgage. Hiring a mortgage broker or mortgage advisor can make the process easier to manage.
A mortgage broker will help you by going over your finances, helping you determine which lenders are likely to offer you a mortgage if you choose to apply, and managing some of the paperwork to save you time on the applications. They can also help you save time and money by helping you skip over lenders that aren’t likely to approve your application.
It is important to note that mortgage brokers usually earn a commission or charge a fee. Brokers need to make you aware of these charges or fees before entering into a contract with them.
Additional Expenses to Plan For
Being able to pay back the mortgage isn’t the only thing lenders look at when you’re applying. You’ll need to consider a variety of other expenses before applying because your ability to afford these costs could impact the likelihood of a successful mortgage. Other expenses to consider include:
- Landlord Insurance — While it isn’t required by law, lenders may require it to obtain a buy-to-let mortgage.
- Legal Fees — Even if you hire a mortgage broker, you may also need a solicitor to help complete the paperwork for a mortgage.
- Product Fees — The fees necessary to secure your mortgage.
- Surveyors or Property Inspections — As the buyer, you need to pay for a surveyor to inspect the property and ensure it’s fit for sale even with a buy-to-let mortgage.
- Stamp Duty — There are additional fees that accompany buying an extra property in addition to the one you live in.
- Agency Fees — These fees only apply if you plan to use an agency to manage your rental property. If you are managing the property yourself, disregard this point.
- Property Maintenance and Safety Inspections — Once you have tenants on the property, you’ll be responsible for the costs of property maintenance and safety inspections.
- Energy Performance Certificate — All rental properties need an Energy Performance Certificate with a rating of E or higher. Once you’ve obtained an EPC for your property, it’s good for 10 years.
This isn’t an exhaustive list of the expenses that might accompany running a rental property, but it does cover most of the ones that could impact your ability to obtain a buy-to-let mortgage.
What If the Property Is Empty?
Even if you’re only paying the interest on your buy-to-let mortgage, the loan period is usually 20-25 years. Even with the best tenants in the country, there is always a chance there are periods when your property might sit empty. While it sits empty, you’re not earning any rental income, which means you may struggle to keep up with your mortgage payments.
Don’t assume your property will always have tenants. Instead, use any extra funds you have available – that aren’t being put back into the property in maintenance or upgrades – into a savings account. This account will provide you with a backup to handle payments if your property is empty. It can also be a useful tool if you have to eat the costs of large repairs such as a broken boiler or a leaky roof.
Expecting the Unexpected
Buying a property for renting can be a great way to supplement your income, but it’s not a project to be started on a whim. If you need to apply for a buy-to-let mortgage, ensure you’re prepared to take on all the extra costs associated with this purchase.
No matter where you’re buying your rental property, make sure you always expect the unexpected. No one can tell when a severe storm might tear your roof off or an old boiler might die as soon as winter arrives and temperatures start to drop. If you’re new to the world of rental properties and looking for your first buy-to-let mortgage, work with a mortgage broker to ensure all your paperwork is submitted correctly.