Getting Finance for your Buy to Let Insurance Property
Approach financing a property as if you were funding a new business, which is effectively what you are doing. Be aware, too, that gaining a mortgage for a buy to let is different to gaining one for your own home. For buy to let insurance property customers there are two types of financing to consider.
1. Letting a property you have lived in
If you are already living in a property and are moving out, the first thing you need to do is to inform your lender and let them know you are planning to let your property to tenants.
Depending on the reason why-for example, company relocation, moving abroad – your lender may let you continue with your current mortgage or request that you move to a buy-to-let mortgage instead, or just charge a slightly higher interest rate. It is important to check out alternative offers from other companies at this point as they may well be more competitive than your own lender.
They will be likely to want to assess your property for rental value to ensure that it meets their lending criteria as a property being let rather than lived in.
2. Buying a property specifically to let
For most buy to lets, the mortgage company will require that the gross rent you receive from letting the property is 125-130 per cent of the mortgage costs you will incur before they will consider lending to you.
The lender will also assess the value of the property, and whatever their valuation gives (which may be lower than what you are offering to pay for the property), they will then offer you 70-85 per cent of that value – leaving you to put down the rest of the money in the form of a deposit.
Over and above the rental income and the property value, the lender will also take into consideration your income to check that you can afford the property should there be a downturn in the lettings market.
If you already have some properties you are letting out, the lender is likely to check your current borrowing versus current rental income. If you are too much of a risk – for example, if your gearing is above 70 per cent -they are unlikely to lend.
The credit crunch
This has caused lenders to offer money more cautiously with a view that property prices might fall or buyers might default. As a result, flexible lending for buy-to-let investors, which was outside the normal 85 per cent lending, has stopped and on new build flats, some lenders have reduced their loan-to-value lending to 70 per cent. Anyone with a history of bad debts, however small, may not be able to secure money. The second effect is the cost of the mortgage. Some lenders are increasing the costs of organising a mortgage and the ongoing interest rates have risen to an average of 7 per cent. In addition, you may have to pay significant arrangement fees. More now than ever, you need to source a good mortgage deal by consulting IFAs and lenders directly.
Lenders that offer buy-to-let mortgages often charge a higher rate of interest (around 1 per cent more) than if you were buying a home for yourself. They also typically charge more in fees to get the mortgage. The types of charges you are likely to pay will vary by mortgage broker or lender, but will be anything from a fixed fee of £400 to up to 1.5 per cent of the mortgage value, and you will need to fork out for a valuation fee by the mortgage lender, which could be anything from £200.