How to get started with Buy to Let, Let to Buy and Holiday Lets

How to get started with Buy to Let, Let to Buy and Holiday Lets

 

Getting Started

In this blog I'm going to cover the key points you will need to consider when getting involved with renting property, for further information please contact the office where we will be happy to help. Remember we do not charge for advising on and arranging mortgages, we're paid by the lender not you.

 

Deposit

One of the first things to cover is the deposit, you will typically need 25% deposit for your rented property. It is possible to arrange this kind of finance with less deposit but the rates are notably more expensive. It is possible to arrange a buy to let mortgages with 20% deposit and potentially 15%. At 25% the rates are reasonable but below that are almost not worth talking about.


Income

Many lenders have a minimum income of £25,000 but this isn’t the case for everybody. Some lenders have a lower figure such as £20,000. Some have no minimum income, but usually still require an income. No income at all is usually uncommon but can be arranged in some circumstances, typically where it’s a houseperson buying the property who is married to a main breadwinner who is staying off the property for tax reasons.


Minimum Valuation/purchase price

Every lender has a minimum valuation, especially for buy to lets. They also have a minimum loan amount. This differs from lender to lender but typically its usually the minimum valuation is around £75,000. There are lenders that have higher and lower figures, but this is a general guide.


Suitable Mortgage Security (habitable)

Buy to let mortgages will all needed to be suitable for renting at the point the surveyor visits the property. If you’re buying it with the intention of doing it up and then renting, it will still need to be suitable when the surveyor goes round which is before you have bought it. Typically they will need a working kitchen and bathroom, not have a damp or structural issue. There are other factors too but these are the more common ones. If one of these are an issue you may need to buy the property cash (which often isn’t possible) or with bridging finance (which is expensive). The surveyors opinion goes, even when its totally ridiculous and clearly wrong. We’ve even had circumstances where a 4 bed semi-detached was valued as a 3 bed terraced property, the surveyor had actually been to the house too. This was a difficult issue to get round. I’ve even had a circumstance where the surveyor said that the property wasn’t suitable because there was a chance North Yorkshire County Council may fail to maintain their legal obligations, we couldn’t get round this even with senior level bank management intervention. I tend to say to people, if you would let your baby or grandchild to live in its probably fine.


How much can I lend?

Whilst with residential property the amount you can borrow is based on the amount you can afford (e.g. combined salary x 4.5, minus outgoings). With buy to lets its based on the rental figure assumed by the surveyor on an unfurnished basis, not what the buyer, advisor, owner, estate agent, solicitor or even a tenant that has been lined up for feel. All of those opinions are irrelevant to the lender, its all what the surveyor says. Their word is gospel.


Age

Lenders typically have a minimum and maximum age, the minimum is usually 21 or 25 for buy to lets. The maximum can be 70 or 75 like with residential mortgages, however the maximum age has become more and more relaxed in recent years whereby its more the maximum age for the application to be submitted rather than the maximum age for the mortgage to end. For example, with a major buy to let lender, as long as you apply before you turn 75 one of the biggest but to let lenders in the UK would allow a 35 year mortgage term. So you can have them well beyond your 100th birthday.


Methods of repayment

Whilst on a residential basis interest only isn’t as easy or simple, in buy to lets its very acceptable and almost standard procedure. Sale of property is an acceptable repayment method too so its not like you need a large lump sum from elsewhere to clear the debt. The deals typically have a 10% overpayment facility too so you can usually pay off lump sums instead. This way you could set up an overpayment for when you have a tenant in and settled in the property, but you’re able to stop the overpayment if the tenant isn’t paying or if the property is vacant. A bit of a safety net if you will.


Portfolio landlords

Once you own more than 3 buy to let properties you will be treated as a portfolio landlord. Once this box has been ticked you will be treated by the lenders, it may not be too major but it does reduce the lenders that you can apply to and therefor can affect the rate you will attain. The rules can differ slightly, some may view it as 3 mortgaged properties whereas others its simply owning them. Once you have more than 10 mortgaged buy to let properties your options will become more limited and you may need to look to specialist lenders for new mortgages.


Limited company

It is possible to arrange buy to lets in limited companies, there are advantages and disadvantages to this. You should discuss this with an accountant to work out if it’s the right or wrong thing for you to do. Most lenders prefer these limited companies to buy an SPV (Special Purpose Vehicle), these are non-trading companies that are mainly used for tax reasons. It is possible to arrange the mortgages for trading companies too but the lenders that will consider these are limited and more expensive than those in a person’s name.


Tax

Tax is a minefield, you really need an accountant to help you navigate the options correctly as to avoid incurring the wrath of the HMRC. Before you get too involved in buy to let properties be sure to discuss everything thoroughly with an accountant particularly around income tax, mortgage interest relief and capital gains.


Commercial

Some people like the idea of commercial property to rent, whilst there are advantages to this its somewhat uncommon as the rates are so much more expensive than a conventional buy to let. For that reason many people shy away from commercial property as the additional cost can severely affect the net profit.


Consent to let / Renting a property with a residential mortgage

If you have a mortgage on a property that is on a residential basis and want to rent it out, you can apply for consent to let from the lender. Some may charge you for the application, if agreed they may increase the interest rate. They may agree it on a permanent basis or a temporary basis, they could simply decline it. It is a standard requirement of most residential mortgages that you do not rent it without their prior permission. Some lenders may allow you to rent a room out, but many will not. You should ask your lender what their rules are, if you know this is something you’re planning to do you could speak to us in advance so we can advise accordingly.


Renting to your family

Renting property to your family is a regulated buy to let, very few lenders operate in this space. If you organise a typically buy to let and the lender finds out you may get a very strong response. Lenders that will allow this arrangement will typically do so by treating it as a second home mortgage rather than a buy to let. In short this means its treated as the owners are paying for everything with no contribution from the occupants. No rent, no income, no contribution to bills, nothing just the owners paying for everything along with all their own debts, mortgages etc. This often kills any application quickly as there aren’t many people who could satisfy the lenders requirements.


Buy to let

So in principle buy to let is as simple as it sounds, buying property to let it out. However in reality there is more to it, many landlords are happy with their tenants and fine it a good means to make money. Others find it horrendous and get out quickly, a lot of the issues evolve around the tenant. If you can take further steps to avoid a problem tenant you will be grateful for it in the long term, but that’s easier said than done. Some people really get the bug with buy to lets, once they start they want to keep going and growing a portfolio. Its worth considering your long term plans before you get too involved and speak to an accountant in case there are options or methods that should be considered or pursued such as buying through a limited company. Whilst its not right for a lot of people, if you want to move property from your own name to the limited company you would be liable for the stamp duty, a nasty bite if you have a few properties.


Let to buy

A ‘let to buy’ is where you remortgage your own residential property onto a buy to let basis to buy another residential property. Typically this involves raising a bigger mortgage to use the funds towards the onward purchase. This used to be very common before the changes to stamp duty as it allowed people to buy, do up, capital raise, rent and buy again; A method used by many clients to build a portfolio. It’s very similar to a buy to let, for the most part it is; however not all lenders will allow it and many will have specific deals for it.


Holiday let / holiday home

Holiday lets and holiday homes are becoming more and more common, especially with covid stopping a lot of people wanting to go abroad. The demand has taken off and people want somewhere to go themselves. You should consider the demand for such properties as it could be short lived, you don’t want to end up with a property nobody wants when the world “goes back to normal”.
AS with normal buy to lets many lenders will have a minimum income for one of the applications, e.g. £25,000 or sometimes higher with holiday lets. Some lenders will look at them on a conventional let basis and consider what rent it would get on a long term basis, others will look at the high, medium and low season demands and then work on an average over so many weeks. As holiday lets typically make more money than a conventional buy to let the options of which lenders to approach can largely be dictated by how they assess the rent.
As some areas may have higher demand for holiday lets than conventional lets certain lenders are simply unable to assist. For example parts of the Yorkshire Dales may be very popular as a holiday let but may not have much demand for a 6 month tenancy, which drives down the rent.
To ascertain the high, medium and low season rents the lenders will typically ask for a letter from a holiday let company such as cottages.com they will then work off an average of those figures over a certain amount of weeks.
Some lenders will allow you to stay in a holiday let property, others will not. No lender will allow an owner to stay in a conventional buy to let. They also won’t allow you to operate a conventional buy to let mortgage when it is to be run as a holiday let. Holiday lets mortgages are usually much more expensive than a standard buy to let, but there aren’t as many lenders offering them.


HMO – House of Multiple Occupancy

A HMO (House of Multiple Occupancy) can provide a notable increase in rent compared to a conventional let. Not all lenders like them, they’ll often want you to be an experienced landlord and then there’s the national & local council rules to consider. They’re much stricter than they used to be so you should do your homework before trying to go down this route, you may want to test the water with a more traditional rental first. Walk before you run, whilst these offer a greater return on investment they do require a lot more management and there are a lot more hoops to jump through. You typically aren’t allowed to run a HMO from a property with a conventional buy to let mortgage on, the lenders will want to charge you more for the greater level of risk.


EPC - Energy Performance Certificates

Before you rent a property on a traditional 6 month AST (Assured Shorthold Tenancy) you will need a valid EPC (Energy Performance Certificate). From 01/04/2018 the EPC must be an ‘E’ rating or higher to rent it out. The rules are more relaxed for properties rented for shorter periods of time such as a holiday let where a person may only be there for a few days. However, From 2025 the rules are expected to change in a big way. To put a new tenant into a property the EPC will need to be a C or better, for many properties this is simply impossible. Others may need an obscene amount of money spending on them to bring them up to scratch. For example, I know a person who had to replace all the windows, external doors and boiler to get the property from a ‘D’ to a ‘C’ so getting something from an E or lower could be totally unrealistic. An EPC is valid for 10 years from the date of issue, its unusual for them to change much as the majority of the factors are fixed in place like insulation, boilers, windows etc. Low energy bulbs can sometimes be an easy upgrade which can help. From 2028 even if you have a sitting tenant you won’t be able to continue to rent it to them if the EPC is not a C or better. In terms of the C rating, some new builds only have a C rating, so older properties could become a major issue. I expect as we get closer to these dates 2 things will happen, the lower EPC rated properties that have been rented will begin to be marketed for sale. If too many leave it to the last minute the values could drop due to an overabundance hitting the market at the same time. Its simple supply and demand. In turn, when supply drops demand should increase and landlords with properties in a lettable condition will likely be able to increase their rent. There won’t be much tenants can do, people often rent for a reason. It could be that they don’t have the deposit for a house, that they can’t pass the affordability requirements, that their credit is problematic or perhaps they just don’t want to. If you’re looking to buy a buy to let property, whatever the type an EPC will be required. If there isn’t a current and valid one the application will be declined by default, the lender will usually give you a timeframe for one to be organised but you should raise this with the agent. The agents should know this as it’s a legal requirement and has been for some time, but I regularly find clients trying to buy properties where there isn’t a valid one.

 

Contact Financial Options Selby

 

Financial Options (Selby) Ltd
24, Finkle Street, Selby, North Yorkshire, YO8 4DS

 

Call: 01757 709888