What Are The Costs Of Remortgaging To A Buy To Let
It can be challenging to gauge the full range of costs youll incur by remortgaging your property to a buy to let, simply because there are some charges you might not expect to pay.
Heres a list of all the costs you might need to pay when switching to a buy to let mortgage:
- Early Repayment Charges on your existing mortgage
If youre currently on a fixed-rate mortgage deal, switching to a BTL mortgage before the end of your fixed term of interest could cost you roughly between 1-5% of your outstanding loan amount in ERCs.
- Set up costs for a new buy to let mortgage
These could range from £500 to £1,999 depending on the lender you go with, the interest rate you pay, and the complexity of your case.
And dont forget about:
- Legal fees and valuation fees
- Property maintenance and agents fees
- Income tax on your rental profits
You may also need to consider whether you want to take out a fixed rate or tracker mortgage product. We have a guide on deciding: Should You Get a Tracker or Fixed Rate Mortgage in 2022?
Remove Private Mortgage Insurance
One reason for property refinance could be to get rid of private mortgage insurance . This policy is required by lenders when borrowers pay less than 20% of the down payment or maybe when the loan-to-value ratio is more than 80%. The PMI protects the lenders from the defaulting risk of buyers on their mortgage.
Prudential Regulation Authority Changes To Buy
The Prudential Regulation Authority regulates a large number, but not all, buy-to-let lenders
Phase I
In September 2016, the PRA announced a deadline of January 1st, 2017, for lenders to put in place recommended new minimum underwriting standards for buy-to-let applications.
The PRA stated that the determination of affordability should incorporate an Interest coverage ratio calculation, which it defined as: the ratio of the expected monthly rental income from the buy-to-let property to the monthly interest payments which take into account likely future interest rate increases.
At the time of its Supervisory Statement SS 13/16, in September 2016, the mortgage industry standard for setting the minimum ICR threshold was 125%. Subsequently, the majority of lenders set a minimum ICR threshold of 145%.
The PRA guidelines went further, recommending that lenders assess a borrowers ability to keep up monthly mortgage payments if rates went up in the future, suggesting that firms should apply an assumed minimum borrower interest rate of 5.5%.
Phase II
Lenders who fell under the PRA rules, had to interpret a second set of changes and implement these by September 30th, 2017. Under the second phase of PRA Rules, the underwriting process applied by lenders became much stricter, particularly for buy-to-let landlords owning four or more properties, labelled portfolio landlords.
In the Supervisory Statement , the PRA stated:
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Do I Need To Tell My Mortgage Provider That Im Renting Out My House
Yes, if you decide to let your property, you will need to inform your mortgage provider. You wont be able to let your property under the terms of a residential mortgage, so letting it without receiving prior permission from your lender could breach this contract.
If youre only looking to rent out your house on a temporary basis, some lenders may grant you a consent to let. This is an agreement that will allow you to temporarily let your property, but getting this consent will depend on your reasons for wanting it and your financial situation.
The lender might charge you for this, either as a fee or as additional interest, and the consent will only be valid for a specified length of time. At the end of the agreement, you may be able to get an extension if needed, or you could switch to a buy-to-let mortgage if you want to continue renting out your house.
A consent to let is not intended to be a long-term means to let your property, but rather a short-term solution to at least cover costs if you are faced with the prospect of paying a mortgage on an empty house.
It means you dont need to go through the hassle of permanently switching to a buy-to-let mortgage, but you would still need to deal with all the other costs and legalities associated with letting a property.
The process of getting a buy-to-let mortgage to rent out your current house, while simultaneously buying a new home with a residential mortgage, is sometimes referred to as let-to-buy.
Land Is A Finite Resource
There is a reason many people invest in real estate: land is a finite resource, and therefore it will over time increase in value. How fast those increases occur and in what areas are some of the variables, but in general land is a solid investment.
Its undeniably convenient that, in putting a roof over your head you can at the same time be providing for your future. Its also true, however, that there will always be people looking to rent, and becoming the person that they rent from can be a great way to generate some income for yourself and pay down the mortgages you use to acquire property.
Lenders actually acknowledge this in the way debt servicing ratios are calculated when theres a rental in the mix. But before we get to that, its important to note that there are two distinct situations where you might have rental income: owner occupied plus rental properties and non-owner occupied rental properties.
As far as determining the actual rent amount to use, in the early stages this can be estimated by your broker for qualifying purposes, and then down the road it is usually confirmed either by a signed lease if the rental is already occupied or a fair market rent letter produced by an appraiser if its not.
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How Does It Work Whats The Process
The best thing to do is speak to a broker when it comes to changes in your circumstances.
If youve currently got a house, youre not living there any more and you want to change it to a Buy to Let then speak to the experts.
Well explain the options in changing your mortgage, the costs involved, and whether you have enough equity.
The quickest process is to approach your current lender and ask for Consent to Let. This is different to Buy to Let, but is the easiest and most common approach. The alternative is to take out a Buy to Let mortgage with a new lender.
Can I Swap My Residential Mortgage For A Buy To Let Mortgage
If you cannot convert your existing mortgage, then remortgaging onto a buy to let product instead may be your only option.
You can remortgage with your current mortgage provider or entirely go with a new lender. You may get a loyalty discount from using the same mortgage provider, but make sure you check whats available to compare to the rest of the market.
If in doubt, speak to a mortgage broker. We have saved our clients thousands of pounds on interest payments simply by switching to a new lender for a remortgage instead of accepting their current providers mortgage rates.
Youll need to pass your lenders buy to let affordability criteria to ensure that you can keep up with your mortgage payments:
To qualify for a buy to let mortgage, your projected rental income will need to cover approximately 145% of the monthly interest repayments from your mortgage.
You are also likely to need at least a 25% deposit for a rental deposit – more than youll typically need to put down for a residential mortgage.
Remortgaging could also be an excellent opportunity to release some equity from your main home to put towards a new property or another asset.
How many buy to let mortgage products are out there?
Moneyfacts recently reported that there are now approximately 2,200 buy to let mortgage products on the market compared to just 1,311 in February last year, marking a 65% increase. It’s undoubtedly a prosperous area of the mortgage market at the moment.
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Is It Difficult To Refinance An Investment Property
You will always find that the interest rate to refinance investment properties is higher and lower to refinance residential properties. This means you cant build your expectations for an offered rate on what you see floating around for residential mortgages at the moment. Additionally, lenders are stricter more when it comes to loan-to-value ratios for rental properties.
A lender determines the LTV by dividing the mortgage total by the appraised value of the property. A higher LTV ratio means that youre a higher risk to lenders. As a result, a high LTV could take you out from very low-interest rates that would improve your rental income.
Lenders always want to see a maximum LTV ratio of 75% if youre thinking of cash-out refinance. If you decide to move forward, you will be having an appraisal conducted as part of the refinancing process.
However, before you pay to have it formally appraised, you can still get a good picture of what your property will be appraised for. Looking at the appraisal sums for equivalent properties that recently sold in your neighborhood can give you an accurate image of what to expect.
How Much Can I Borrow On A Buy To Let Mortgage
The amount you can borrow on a let to buy mortgage depends on several factors that have to be carefully taken into account. However, the biggest influence comes from the amount of rental income that you expect to receive.
Usually, lenders need this income to be around 25 to 30% higher than your mortgage payment. Naturally, you will also have to take into account the value of your current property, the existing mortgage balance, as well as your income, in some cases.
Naturally, we recommend you consult with specialists or talk with local letting agents in order to find out exactly how much you could borrow on a buy to let mortgage. If you wish to change your mortgage, it is important that you have taken every risk and factor into account before applying for a loan or a new mortgage.
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Change In Government Policy
Until 2015, Government policy in respect of buy-to-let had been relatively benign, but this changed in the Budgets and Autumn Statement of 2015. Four major steps were taken to reduce the attractiveness of the investment:
What Kind Of Investment Loan Would You Get
If you end up needing to change your owner-occupier loan to an investment loan, you might find that youll have different features attached. Your requirements might also change once your home converts to an investment, so you might want to look into things like using an interest-only loan to claim interest as a tax deduction.
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Is It Illegal To Rent A House On A Residential Mortgage
It isnt illegal from a criminal standpoint, but it is a breach of the contract you have with your lender. You are obliged to tell them that you are letting your property out if not you can be in a lot of trouble.
Contractually, the lender would be within their rights to retract the lending and potentially request the money back.
My advice is to always be honest. Be transparent and tell the lender what your intentions are, what your plans are. A broker would be able to tell you whether its allowable.
How To Switch To A Buy
Here are the steps to follow to switch to a buy-to-let mortgage from a residential mortgage
We offer a free broker-matching service that will pair you with a mortgage advisor who specialises in helping people switch to buy-to-let. Make an enquiry online with us and well set up a free, no-obligation chat between you and your ideal mortgage expert today.
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Refinance Before Its Too Late
Its much more difficult to refinance a rental property than the one you own and occupy. So, if you need to refinance, you want to do so while youre still living in the home that is destined to become a rental unit.
Related: Should I refinance? Reduce your interest rate in 2018
Your decision to convert your home into a rental may be the smartest move youll make this decade. Many landlords remain delighted they made that choice.
But its vital you make the move with your eyes wide one: that you recognize the downsides and risks as well as the advantages and rewards. Only push the button once youre satisfied you have the whole picture.
What Are The Benefits Of Consent To Let
Consent to let obviously guards you against committing mortgage fraud. But as a bridging mechanism while you change your mortgage, it has important benefits:
- It reduces stress in times of upheaval. Having to relocate for any reason is a major undertaking, and changing your mortgage at the same time is an additional burden. Consent to let gives you more time and space to arrange this.
- With consent to let, you can try out letting your home without fulling committing yourself to it. Then you can easily change your mind if things dont work out.
- Its quick and straightforward to arrange, so much easier than remortgaging .
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Where To Get A Buy
Most of the big banks and some specialist lenders offer BTL mortgages.
Its a good idea to talk to a mortgage broker before you take out a buy-to-let mortgage, as they will help you choose the most suitable deal for you.
Learn more, including where to find an adviser, in our guide Mortgage advice: should you use a mortgage adviser?
How Do I Set Up A Buy
Whether youre getting a buy-to-let mortgage for a new property purchase or youre switching from a residential mortgage, you still need to meet the lenders requirements and go through the usual application process.
Criteria for buy-to-let mortgages will typically be stricter than for residential mortgages, with eligibility based on your credit rating, income, and how much rent you will charge, among other factors.
Because of the added risk involved with buy-to-let, lenders may be more reluctant to approve applications. As a result, you will often need to put down a bigger deposit , and you may also be subject to higher fees and interest rates than on a residential mortgage.
The majority of buy-to-let mortgages are interest-only, which means you only pay the interest of the loan each month, and then pay the rest of the capital at the end of the term. Landlords will often sell the property to pay this.
Both you and your mortgage provider need to be confident that you can realistically afford a buy-to-let mortgage, and that you will still be able to cover costs if your property is empty for a period.
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Search For A Property And Make An Offer
Location, location, location but there are other factors too. Here are some things to think about when searching for a rental property:
- Do you want it to be close to home?If you need to regularly visit the property, it will be easier to manage if its nearby.
- Are there already tenants living on the property?Ideally the answer is yes because a rental property with existing tenants provides immediate income.
- Will the property be easy to rent?Investing in a property thats in a neighbourhood with high demand for renters can help minimize long vacancy periods.
- Does the property need repairs?If you need to hire professionals to take care of immediate repairs, take the cost into consideration.
Now you can use Realtor.ca to find rental properties for sale in your desired area and price range.
Location, location, location but there are other factors too”.
Set Reasonable But Firm Lease Terms
Always work with a lease and know that laws vary from state to state. When creating your rental agreement, make sure to include the following items:
- Lease term: A month-to-month lease works best if you want to eventually sell your property. If selling is not your goal, aim for a year-long lease.
- Security deposit: First and last months rent is advised.
- Rental due date: First of the month is advised to ensure you can make your mortgage payment.
- Repair responsibilities: Spell out who will pay for repairs, such as appliances, plumbing, light fixtures, etc.
- Landscaping: Determine who will pay for routine property maintenance, such as trash hauling or lawn care.
- List of tenants: The names of each tenant living in your home.
- Good conduct clause: A list of behavior requirements, including noise levels, neighborly conduct, and smoking.
- Pet policies: Pets may cause disruption or damage. While you may advertise a no-pet policy, you cannot deny housing to anyone who requires a support animal. You can’t ask for details about someone’s disability but you are able to ask for proof that the animal is prescribed by a medical professional. And remember, you may be able to charge a damage deposit for the animal but you can’t charge pet rent.
- Eviction terms: List the reasons for which youd evict the tenant, such as not paying the rent or damaging the property.
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