UK property is one of the most attractive options for investors as there is a lot of demand for accommodation across the country. Beginning with easy availability of tenants, through to investment options, high growth potential and long-term stable source of income, property investment UK offers it all. Switching from a residential mortgage to buy to let is an attractive option for potential BTL landlords as it allows them to be part of the buy to let segment and benefit from the advantages that the buy to let sector offers.
Moreover, the demand for rental accommodation continues to rise as there is a shortage of new homes coming onto the market. Apart from this, rising house prices have weighed on affordability and an increasing number of potential first time buyers are being priced out of the market. This means, there is a lot of potential for property investment UK. Therefore, there is a lot landlords can look up to as they can invest in the letting business through options such as the buy to let. While existing landlords are already reaping rich benefits by letting out their properties, those with residential mortgages can also be part of the letting business by converting their residential mortgages to buy to let mortgages.
What is buy to let mortgage?
Buy to let mortgage is a loan to landlords looking to buy a property for the purpose of renting it out. Although the rules of BTL mortgage are broadly similar to other mortgages, there are some rules unique to the buy to let mortgages. For example, the fees and interest rates around the BTL mortgages are much higher than other mortgages. The minimum deposit for a buy to let mortgage is usually 25 per cent of the property’s value, though it may vary between 20 and 40 per cent. Most mortgages are interest only, which means the landlord is required to pay a monthly interest only during the term of the mortgage, but needs to repay the original mortgage in full at the end of the mortgage term.
Changing residential mortgages to buy to let
Switching from a residential mortgage to buy to let is an attractive option for potential BTL landlords as it allows them to be part of the buy to let segment and benefit from the advantages that the buy to let sector offers. Such investors can let their existing property to tenants by changing their residential mortgage to buy to let. However, it finally comes down to the mortgage lender who may approve or disapprove the landlord’s proposal for switching the mortgage. Since a buy to let mortgage carries more risk in comparison with a residential mortgage for a lender, they may not accept the proposal to convert the existing residential mortgage to buy to let. As lenders are aware of the risk associated with letting a property to tenants, they may not approve the proposal. It is possible that the landlord may run out of sufficient finances if tenants fail to pay their rents on time.
Apart from this, changing of the residential mortgage to buy to let depends on a number of other factors such as the current mortgage type, the purpose for the change, future living arrangements of the borrower, other mortgages the borrower has, the type of property, the landlord’s personal circumstances and the terms and conditions mentioned in the original agreement with the lender. In this case, when the lender does not give consent to change the mortgage type, the only option with the landlord is to remortgage with another lender.
Even within the buy to let mortgages, there are a number of options to explore, so it is necessary to identify the right mortgage or it depends on the landlord to identify the buy to let which best meets the requirements according to personal circumstances.
However, landlords should be aware that mortgaging with another lender may attract penalties from the existing mortgage lender. The extent of penalty depends on the term of the mortgage.
The remortgaging process is a new one and it is similar to the original mortgaging process and involves similar criteria for lending such as credit scores, to make sure that the borrower will be able to keep up with the monthly payments and so on.
The lender may also want to know whether the would-be buy to let landlord will be able to fulfil the duties and responsibilities that come with being a BTL landlord. As there are legal obligations that a landlord is required to follow as part of landlord duties which involve finances, the lender needs to know whether the would-be landlord will be able to meet the requirements. For example, landlords are required to keep tenants up to date with certificates and have all gas appliances serviced regularly. Landlords need to prove to the lender that they will be able to manage unexpected costs arising out of tenancy, such as maintenance and repair at the property. Landlords also need to prove their financial status to the lender in terms of their ability to pay income tax on the rental income after deducting their daily expenses. Lenders will also like to make sure that the borrower will be able to repay the mortgage during void periods of tenancy.
Living in a house with a buy to let mortgage
Usually lenders do not allow customers to live at a property with buy to let mortgage. There may be serious consequences if a landlord is found living at a property under a buy to let mortgage. If a customer lives at a property with buy to let mortgage, it invalidates the mortgage. Depending on the lender, there may be other serious consequences and the lender may even ask the borrower to repay the loan in full. Lenders will also check the landlord’s annual income to see if they can continue making repayments.
Therefore, it depends on the lender who may or may not give the consent for switching the existing residential mortgage to buy to let. The best option on the part of landlords is to make the mortgage lender aware of their plans before proceeding as breaching the terms and conditions of the loan may have a serious impact.
When is buy to let remortgage allowed?
The time period after which the landlord is eligible for a remortgage depends on the lender, which may can be six months or more.
This article is for information purposes only.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.