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Property investment can be expensive. Due to its status as a physical asset, property can sometimes come with a hefty price tag even in affordable areas of the UK such as Liverpool.
Many who choose to invest in real estate therefore look to spread the cost of their investment out over time, and there are several ways of going about this.
With off-plan properties, there are often payment plans set up which see investors pay a part of the property’s price at each stage of the development, rather than buying the property as a lump sum.
However, for fully built properties, investors are normally expected to pay the entire price of the property in one go. For many, this sizeable investment can prove to be a daunting prospect.
Parting ways with tens of thousands, or even hundreds of thousands of pounds, can be a nervewracking experience given the risks associated with investing.
One way of spreading the cost of investing over time is by borrowing a mortgage to purchase a property. This is a popular way to purchase residential property, especially for those buying homes to live in.
For investors, borrowing a mortgage isn’t as simple as it is when buying property to live in.
This guide will explain if you can get a mortgage for an investment property, what kind of mortgage you can use, how you can apply for a mortgage and if you can use a residential mortgage for an investment property.
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By submitting your details you agree to allow RWinvest to store and process the information submitted and receive product information and other communication, as stated in the privacy policy.
When buying property to invest in, you can choose to use a buy-to-let mortgage to help you pay for the property.
Buy-to-let mortgages are quite different from regular residential mortgages, both in terms of the requirements for them and how they are repaid. Investors must understand these differences, so they are not investing under incorrect assumptions.
Given the increased risks of using property as an investment compared to living in it, lenders have higher standards when reviewing applicants for buy-to-let mortgages. These requirements differ from lender to lender, but generally fall under similar guidelines:
Specific lenders may have their own additional requirements, but these are general guidelines you should aim toward if you choose to borrow a buy-to-let mortgage.
There are several other ways in which buy-to-let mortgages differ from residential mortgages, as you will normally be expected to pay a much larger deposit upfront compared to a regular mortgage.
Most buy-to-let mortgages have a deposit of anywhere from 15-25% of the property’s price. This is much higher than the usual 5% deposit of a residential mortgage and is reflective of the higher risk of investing.
The biggest difference between the two kinds of mortgages, however, is the fact that you can often leave the amount of money borrowed in a buy-to-let mortgage untouched during the term of the mortgage.
Instead, you make monthly repayments on the interest accrued from the mortgage. These interest-only payments are made using the rental income you collect from the property, as this gives you a monthly cash flow.
The interest rates are set at the beginning of the mortgage and are usually higher than residential mortgages, so the lender makes more of a profit from the repayments.
Buy-to-let interest rates are currently at high levels, with the average two year fixed rates hitting 3.41% in May. This was the highest level of interest seen in seven years, according to the Telegraph. Investors can expect to pay much more compared to recent years on their mortgage payments.
At the end of the mortgage term, you must repay the mortgage in full. This is usually a large amount of money, so many choose to either sell the property to pay the mortgage or refinance the property and continue the cycle.
If you choose to remortgage the property, then this will mean you consistently eat into your profits, so finding a way to pay off the mortgage is ideal for investors so you can earn higher returns over time.
Lenders will base how much they are willing to give based on the market value of the property and how much of a return you are expected to make by investing in it. This is known as a loan-to-value ratio, often shortened to the phrase LTV.
Lenders will want a lower LTV to ensure you can keep up with the mortgage repayments. This will likely cause a higher down payment, but this means the mortgage will be cheaper in the long run.
Therefore having a mortgage that is less than the property’s value is a good way of paying less over time, though it means a larger cost upfront.
Something important that you need to know is most buy-to-let mortgages are not regulated by the Financial Conduct Authority (FCA), which is why lenders often require more of a deposit.
Their money is at more risk than with residential mortgages, as if you default on the repayments their money is lost, so they want to protect their money more.
If you decide to apply for a buy-to-let mortgage, then the first step is researching mortgage providers to find the best interest rates and conditions for you.
There are a range of buy-to-let mortgages available in the UK, so it might be worth contacting an estate agent to find what is best for you.
Another early step is to ensure your finances are in order before you apply for any mortgages. Your credit history will play a big part in being accepted for a buy-to-let mortgage, so you need to ensure any high-interest debts like credit cards are paid off.
Preparing the documents you will need for your application is also important. Applying for a mortgage is a process that takes time, so having what you need ready helps to speed it up.
As a general rule of thumb, you should make sure you have these documents ready to present to lenders when applying for a buy-to-let mortgage:
Having a good credit score highly increases your chances of being accepted for a buy-to-let mortgage. Debts with lower levels of interest such as residential mortgages should be fine so long as you can prove you can balance repaying them with the added cost of the buy-to-let mortgage.
Owning property already is something else which will put you in good stead for being accepted for a buy-to-let mortgage. Existing homeowners can prove they can manage to pay back a mortgage, as well as having a stable enough financial situation to support the repayments.
Already having experience as a landlord puts you in good stead. Although first time property investors can be accepted for a BTL mortgage, knowing what to expect from property investment will help convince mortgage lenders you will be able to make monthly repayments.
Affordability for buy-to-let mortgages is mostly focused on how much rent the property will generate. Mortgage brokers will be looking at the expected rental yields of the property as an indicator of whether the property will be able to support the mortgage repayments.
Although first-time buyers can borrow a mortgage for an investment property, it is normally more difficult and you will likely have to pay more of a deposit upfront and deal with higher interest rates.
Your mortgage application for a buy-to-let mortgage also depends on what kind of property you want to invest in. Off-plan properties are sometimes not accepted for a buy-to-let mortgage due to mortgage lenders believing they come with increased risks.
Mortgage brokers will want to ensure they get their money back, so hopefully, this information will help you understand your eligibility for buy-to-let mortgages and how you should go about applying for them.
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Residential mortgages have lower costs up front, lower interest rates, and more regulation than buy-to-let mortgages. They are often easier to be accepted for, with more lenient requirements.
This may cause you to wonder what’s the point of using a buy-to-let mortgage at all, given all the ways a residential mortgage is better for borrowers? Can you use a residential mortgage for investment property?
The short answer: no.
You can only use a residential mortgage if you intend to live in the property yourself. If you charge rent on a property which you bought with a residential mortgage, you are going against the terms of the mortgage.
This is mortgage fraud. Committing mortgage fraud can have serious consequences, such as being asked to repay the mortgage up front or having the property repossessed.
Your lender only needs to check lettings ads or the electoral register to find out if you are renting a property bought with a residential mortgage, so it is not worth the risk.
If you own a property you want to rent out, you need to talk to your lender about changing your mortgage to a buy-to-let mortgage or getting content to let. This will involve paying a higher rate of interest on your mortgage, or a fee.
Consent to let is a short term solution that many lenders will not agree to, so if you want to become a property investor then buy-to-let mortgages are your only real option if you want to rent a property long term.
If you are buying a property with the intention of using it as an investment property, buy-to-let mortgages are the only mortgage options you should be considering.
While there are many reasons why you should consider a buy-to-let mortgage, it may not be the best way for you to buy an investment property.
They are a good way of establishing your buy-to-let portfolio thanks to how they spread the cost of investing out over time, making property investment more affordable.
Buy-to-let mortgages can help you afford properties that might otherwise be outside your price range, or can be a good way for beginners to property investment to begin earning returns.
However, the interest repayments will eat into your rental income each month, meaning you will make less of a return on your property.
With the Bank of England set to increase its base interest rates, you may see your interest rates go up in the near future, which will leave you with the uneasy choice of either raising rental prices in your portfolio or having less returns.
If you can invest in property without needing a buy to let mortgage, it frees you to earn more money from your investments, without the worry of finding the money to repay the mortgage hanging over your head.
Generally speaking, if you have a sizeable amount of money you want to invest in property with, avoiding buy-to-let mortgages means you can invest faster, earn more from your investments, and deal with less hassle.
The decision is ultimately yours, and your financial goals, options and funds will help you decide. Speaking to a financial advisor or lettings agent is a good idea to help you understand your options.
If you want to learn more about buying investment properties or buy-to-let mortgages, our sales team here at RWInvest have over 17 years experience in the property market, and can find you the best deals to fit your price range.
John is a property writer here at RWinvest. With a close eye on property market news and updates, John writes detailed and informative articles on a range of topics that are helpful for anybody looking to invest in UK property.
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