The right way for contractors to do Buy-to-Let mortgages

Cornerstones of a sound Buy-To-Let strategy

Here are the fundamental elements you need to consider about your buy-to-let investment:

Tenants

Who's likely to rent in your property's area? Knowing your market will help keep tenants in your property for longer.

Young families? 

Are you close to a school catchment area and public transport? Is there parking in walking distance? 

Professionals and couples? 

What are the links like to towns and cities? Think commute, night life, local amenities. They should all be accessible.

And what about students? 

Think about decor, room size and proximity to the college or university. Students don't tend to need 3 bedrooms and gold-plated bathroom fittings.

Return on investment (yield)

Before you apply for your mortgage, you'll need to know the rental income you'll receive. Do your research: gauge the rent similar properties in the area command.

You then need to offset that against the cost of owning and maintaining a rental property.  Is that rental expectation realistic against the cost of your mortgage? 

Rules have changed, under the guise of bringing more regulation to the buy-to-let industry. 'Wear and tear' allowance and tax relief on mortgage interest are all but moot. 

The lowest ratio (loan to rental income) lenders accept has settled to at least 125%. Some lenders may want more, depending on a multitude of other factors.

In short, there's a lot to take in, a lot to work out. It's more important than ever to seek an experienced hand when buying a rental property. You should definitely seek out an expert at Freelancer Financials for free, impartial advice.

Talking of which, here are a few frequent questions prospective landlords pose:

FAQs

Q. How much do I need to earn to get a buy to let mortgage?

A. How much you earn impacts buy-to-let applications less than it does residential mortgages. Lenders take more interest in the return you can expect from your property than your income. 

That's because the property itself is the income medium: it should pay for itself. That said, a lender will expect you to earn at least £25,000 independently. With regards to proof of that income, it's straightforward through a contractor-friendly broker. They will know exactly what 

Q. What are the repayment options?

A. Most buy-to-let mortgages are interest-only. That means you only pay the interest on the mortgage balance every month. Your job is to make sure that the monthly rent covers the interest, + 25% at least. So if your monthly repayment is £300, your rental income must not be less that £375. 

Q. Are there any other costs?

A. There's a reason lenders ask for rent to be at least 125% of the repayment amount. You'll have to consider landlord's insurance and letting agents' fees. Plus, you'll need to squirrel away an amount to cover maintenance.

If you have/have had any type of mortgage, you'll pay Stamp Duty +3% upon buying the property. Think about contingency plans for when the property is empty, too.

And talking of contingency plans, think about 'negative equity'. You shouldn't rely entirely on selling your property to pay the mortgage off. As you're never reducing the capital you owe, you'll have to repay the whole value at the end of the term. Talk to an advisor about suitable repayment vehicles for the term of the mortgage.

Q. What about the deposit?

A. The least deposit you'll have to find for a buy-to-let mortgage is 25%. But the most competitive interest rates begin at 60% LTV (40% deposit).

The more you put down, the less chance there'll be of selling the house and still owing the lender. Plus, you'll be paying interest on a lot less capital, so your 'profit' should be higher. Interest rates on buy-to-let are higher than on residential mortgages. So, the less you borrow for a mortgage, the better off you'll be.

Q. Could I use buy-to-let to buy a second home?

A. In theory, yes: you can use buy-to-let to buy another home. As lenders rely on rental expectation, you don't have to 'prove' you can repay both mortgages.

That said, you should look at the big picture. Can you afford both mortgages, double maintenance and a repayment vehicle for the buy-to-let? 

If you were using a second home yourself, chances are you'd spend more time on its decor. You'd be the ones picking up the bills and there'd be no 'profit' from income. Run through the figures with a qualified advisor to fully understand the implications.

Q. Can I rent out my current home, then buy a second property to live in?

A. Let-to-buy could be an option if you can't or are reticent in selling your current home. You may have made memories there or want to leave the home in your legacy. Or you could be one of the 1,000s of vendors frustrated by the inactivity of new homebuyers. 

With tighter lending guidelines, renting is becoming the go-to for younger couples. Even if house sales in your area is slow, the rental market could be flying!

You can use your current house to get a piece of that action, while you buy a second property. Again, the maths must work. Speak to Freelancer Financials if let-to-buy sounds like the solution for your situation.

Q What about releasing equity in a current rented property to buy a new one?

A. Remortgaging is a great way to expand your portfolio. You can even remortgage interest-only mortgages, so you have options.

For contractors who've gone through standard lenders in the past, there's an opportunity here. Our mortgage partner, Freelancer Financials, are an independent, whole of market broker. They only deal with underwriters who understand contracting. A larger mortgage through them may cost the same, or even less, than your current deal.

Yes, there are lenders who specialise in Buy-To-Let. But that doesn't mean they know how to interpret your contract income. Through our partner, you can access the broadest spectrum possible.

Changes to law have made the buy-to-let market less lucrative for landlords. There's no denying that. But for those who take advice from the outset, the rental market still has potential. 

Move your mindset: property rental is a business, an investment, not a hobby. Take the time to get a detailed appraisal before you commit. With the right advice, the first property in your empire is just a form submission away. Send Freelancer Financials your enquiry now to begin laying those foundations.