Buy to Let Mortgage Guide
What is Buy to Let Mortgage?
A buy-to-let mortgage (BTL), also known as an investment mortgage, is designed for borrowers who want to buy a property to let out to a third party (e.g. tenants). The amount that the buy to let landlord receives in rent may be over and above the mortgage payments and will help to offset the management and maintenance costs of the property.
Over the past few years, more and more expats have taken to investing in buy to let property as a long-term opportunity to make profitable returns, as well as a way of securing finance for their retirement plans.
Most of the properties being bought by UK expats are what are called buy to let properties or BTLs. Often the expat wants to purchase a property in which he or she intends to live in at some point in the future but buys it as a BTL for the moment. BTL properties come in all shapes and sizes so let us define what these are and address how they are used and operated.
Typical UK expat Buy to Let property locations
- BTL in London – Being the capital city of the UK and a leading world financial centre London has always been a mecca in which overseas people seek to own property. In recent times property values in London have grown faster than the rest of the UK and with its diverse property types, strong rental market and high rents, it is ideal.
- BTL in university towns – These are very favoured locations where landlords position themselves with property that is suitable for letting to students during university and college term time. Typically these properties will have multiple rooms with each having some form of washing or cooking facilities while using communal areas for socialising. These types of property are termed homes of multiple occupancy or HMOs. Mortgages for HMOs are generally more difficult to obtain and not all lenders will accept them. However, with rental income usually being very high, overall they tend to come top when it comes to calculating the yield on your investment.
- BTL in Inner cities – in these locations properties are fairly varied but will often be flats of one, two or three bedrooms which are suitable for single people or couples who may move fairly frequently or who are saving to buy their own home. Professional people moving jobs or being assigned to a temporary employment will often rent family accommodation with gardens and parking.
- BTL general locations – Virtually any area of the UK can lend itself to being suitable for rent as can virtually any property.
To put this into perspective it is thought that around 15 percent of the UK privately owned property are BTLs.
UK Buy to Let legislation
There has been a raft of legislation issued in the last couple of years on BTLs from tax allowances on mortgage interest to how stamp duty is applied. These tax changes are designed to control the growth in the BTL market and allow more scope for young people to get on the housing market.
Buy to Let Finance for UK Expats
Expats buying BTL property in the UK face some quite difficult problems as the number of available lenders in this market has been reducing while at the same time they have been tightening their lending criteria. There is no rule of thumb to lending criteria as the lenders who remain will all apply different criteria making it essential that proper advice is sought when arranging a mortgage if you are to be successful.
What are the Lending Guidelines?
Expat lending guidelines – these are just a few basic things to consider.
- BTL deposits – As a minimum, you will need to put down 25 percent of the property value as a deposit. However, if you look at mortgage cover below, you will see that this might not be sufficient for a particular property.
- BTL payment methods – traditionally, most BTL mortgages were taken out on an interest-only basis. This means that only the interest on the loan is paid each month with the outstanding loan becoming due as a lump sum at the end of the mortgage period. This had two advantages;
- The interest payments were low allowing the rent to provide a positive monthly income.
- Property values traditionally rose at a high-level meaning that at the end of the mortgage term the outstanding loan would be insignificant against the property value.
Today, most BTL mortgages are on a repayment basis which means that a mixture of interest and capital is paid to the lender each month often meaning that the rent on the property won’t cover the mortgage.
- BTL mortgage cover – for any expat buying a BTL property in the UK through mortgage finance, the lender will use standard guidelines to establish if the rent is sufficient to cover the loan. Currently, the mortgage repayment on a capital and interest basis will be calculated using an interest rate of 5.5%. Having obtained the monthly payment on that the rent obtained by the property would need to be at least equal to that figure multiplied by 1.45. To illustrate this if your monthly repayment on your mortgage was £1,035 your rent would need to be £1500 per month.
- Expat countries of residence – The countries that lenders will accept for residency is continually changing but they are defined by Financial Action Task Force (FATF). Currently, there are about 28 of them, generally located in north and south America, Europe, Australia, South Africa and North and east Asia.
- Expat employment – Lenders will have restrictions on what they will accept as acceptable types of employment and also the types of employers. As it is really secure income that’s being assessed borrowers could be in the following categories.
- Employed – Expats who work as employees of companies are ideally what any lender is looking for. Lenders feel more secure when clients have a steady known income that can be reasonably expected to continue into the future. However simply being employed is not enough as lenders will take account of the standing of the employer and the currency in which the salary is paid. Generally, the currency needs to be a hard currency such as the Pound Sterling, the Euro, The US Dollar etc but the employer also needs to have good standing. Preferred employment is with international companies, armed forces personnel, teachers and other professional occupations.
- Self Employed – The currency situation applies as stated above and self-employed people are acceptable provided that they can produce certified accounts from internationally accredited accountants. Simply having accounts from a local accountant will not be acceptable.
Buy to let purchase via a limited company for UK Expats
Due to the changing tax considerations, many landlords who hold a portfolio of BTL property have been looking to transfer them from private ownership and put them under a limited company. For more information read our limited company buy to let guide.
Purchasing a business
Perhaps you are intending to purchase a UK business which will require a commercial mortgage. Due to the wide variety of businesses on the market and their very different financial situations, commercial mortgages will be considered by lenders in relation to the health of the business and your ability to run the business. For more information read our commercial mortgages guide.
Expats buying at auction – A lot of property sold in the UK to landlords is sold through auction houses where properties are auctioned to the public on the day. This can often be a low-cost way of obtaining BTL property but needs certain preparations to be arranged if finance is needed. Once the hammer goes down on the property you are then obliged to pay for it. Some things to consider are shown below.
- Down payment – usually, a down payment of 10 percent of the sales price must be paid on the day with the remainder within 30 days.
- Purchase money – as it can be difficult to arrange mortgage finance in advance for a property with an unknown value other arrangements need to be put in place. Often a bridging loan will be used as a temporary position until a mortgage can be set up to take out the bridging loan.
- Property refurbishment – Often the property will require a certain amount of updating before it would be suitable for rent so provision for this money needs to be made.
- Bridging loans – They are usually short loans to finance for periods of less than a year and should be set up to be replaced with a conventional mortgage arrangement for the long term. They are commonly used when buying property through an auction house.
Buying off plan
Buying a property off-plan (buying before the property is actually built) has been seen as a simple way for UK expats to get into buy-to-let in recent years. One of the reasons for the popularity of buying off-plan is the fact that landlords can make a healthy paper profit as soon as the property has been built due to house price inflation. Here are some things to consider.
- Structural guarantee – buying off-plan also gives the property a structural guarantee.
- Rental yields – new developments can be flooded with buy-to-let investors and when these new build development properties come onto the market at the same time the rental yields can be forced down as a result.
- Discounts – many off-plan developers now offer special discounts to try and tempt purchasers to invest but it is important to stand firm and not fall for such developer incentives as some firms inflate the initial price so that they can spotlight grabbing discounts.
Lender Surveys Requirements
Your mortgage lender will always require a survey on any property on which it intends to lend. These surveys are often simply to establish the true market value of the property and will give only limited information on the actual condition of the property. With BTL property where it is intended to do some building work and upgrading or where the property is old, it can be sensible to arrange for a full structural survey which will give you a detailed report on the true condition of the property, prior to committing to purchase.
Dealing with builders, estate agents and letting agents.
- BTL locations – expats will probably need to use a letting agent due to being overseas. Where possible you should consider purchasing property that is in the vicinity of trusted family members in the UK who can liaise with your letting agent or help with problems with the property.
- BTL Letting agents – don’t take notice of promises of high rental yields by letting agents. Try and contact them first as a potential tenant to help get to the facts about local market conditions.
- BTL Property condition – take note of the property’s decoration. Properties with poor décor can often be bought through estate agents at a bargain price.
- BTL market conditions – The market remains buoyant but due to Brexit and recent tax changes there are some good opportunities to pick up prime property quite cheaply. If you are thinking of investing in a buy-to-let property now is probably a good time to do it and get a quicker return on your money.
BTL legal matters
Whatever type of property you intend to buy, you will need a UK solicitor to finalise the purchase and conclude contracts. Your solicitor will check your financial arrangements, arrange payment with the seller, pay stamp duty and register you as the property owner. For more information & help with legal matters please read our Expat buy to let legal service guide.
Buy to Let Insurance Requirements
- Buildings insurance – The lender will require that you take out buildings insurance covering the rebuilding cost of the property. It should be noted that if you are buying a property situated in an area that is subject to flooding you may not to get insurance for it.
- BTL special policies – There are insurance policies available specifically for Landlords where cover can be provided for loss of income between lets.
- Personal insurance – If you don’t already have this insurance in place you may wish to consider this now. Protecting yourself or your family against future events that may cause you to be unable to repay the mortgage is important. A short list of the things to consider are:
- Death – if you were to die, would your family be able to remain in the property. Mortgage protection insurance can protect against this risk.
- Critical Illness insurance – it is now more likely that people with mortgages are more likely to suffer a critical illness that leaves them financially insecure than they are to die. A suitable critical illness insurance policy can protect against this.
Buy to Let lending regulations
BTL is considered to be a commercial activity and currently does not come under the remit of the UK’s financial conduct authority. What this means is that the normal protections that apply to financial services within the UK are not applicable to mortgage products taken out for BTL property.
Buy to Let Mortgage Application Process
In order to make the process as simple as possible, we have provided a guideline of the steps followed when taking out a mortgage as an expat.
