Buying to Let in 2013?Posted on: 10 September 2013 by Ronan Marrion
Ronan Marrion looks at the potential pitfalls of the buy to let application process, and how to avoid unnecessary costs and fees.
Property prices may be down, interest rates low, rents up… Looking at things from one angle, it seems a bit of a bleak picture. But it doesn't have to be. Look at things another way and these could be things to take advantage of.
If you're thinking that a buy to let might be for you, we've a few tips for you below. To start with, we would suggest you use an independent broker to guide you through the process of taking out a buy to let mortgage. All good independent mortgage brokers will know the potential pitfalls of the buy to let application process, and will make sure you avoid them, along with any unnecessary costs and fees.
There are fewer restrictions on buy to let mortgages than there are with ordinary residential mortgages. On one hand, this can mean they are easier to apply for, with less paperwork. But on the other hand, it means that they are not regulated by the Financial Conduct Authority (FCA), so you have less protection should anything go wrong.
Most lenders do require you to have a minimum income to meet the loan repayments. The average minimum income requirement across those lenders who do have them is £25,000. Those few lenders who don't have a minimum income requirement, generally have higher interest rates.
What about deposits? For buy to let mortgages, High Street lenders will require you to have a minimum 25% deposit. If you want a better deal on interest rates, you need to aim for a deposit of 35% - 40%. Here again, any good independent broker will help you gain the best deal, and find exactly the right lender and product for you.
Every lender has a slightly different application process and criteria for borrowers. The general rule is that a lender will want proof that the rent from your Buy to let property will cover 125% of the mortgage. What many lenders will also do is 'stress test' your borrowing, so for example, even if the rate you are borrowing at is 3%, they will 'stress test' it at 5%, to make sure that if rates rise, you will still be able to meet repayments.
What this actually means is that if, for example, you have a £100,000 mortgage, your lender would require your property to generate at least £729 per month in rent, to cover the possibilities of interest rates at 7% (even if your actual interest rate is only 4%).
Another advantage of using an independent broker to find your buy to let mortgage is that they will liaise with all the other professionals involved in taking out a mortgage and buying a property, such as your accountant and solicitor.
Applying for a buy to let mortgage is a fairly intensive, two stage process. The first stage is assessing what you can afford to borrow, and the second stage is to find the best lender and mortgage for you. For example, if you already have one mortgage or more, you may not be looked on favourably by a lender, as some have limits on either the number of mortgages you can hold, or the amount of mortgage debt you can have.
This is where a good mortgage broker really comes to the fore. With knowledge of the whole lending marketplace, your broker will search every lender and mortgage for you. Your independent broker should charge you a one-off fee, but you are likely to save more than you pay by saving several application fees if the product you apply for turns out to be unsuitable. It's also possible that by you making numerous application, with associated credit rating checks, you can do some damage to your credit rating.
Your home may be repossessed if you do not keep up repayments on your mortgage.
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