LANDLORDS BUY-TO-LET FINANCE: MORTGAGES EXPLAINED FOR LETTINGS, HMOs AND SERVICED ACCOMMODATION

Becoming a landlord, growing a portfolio and creating a passive income can help you switch careers, change your lifestyle and build a solid financial future.

There are various models of a buy-to-let business, and you don’t necessarily need to be a property owner to get started. But as you become more experienced, lenders will consider you for the more specialist areas of the market.

Although there are many different lenders and countless different deals, certain criteria apply across the board. Most lenders require the projected monthly income to be at least 125% of the mortgage payments, and buy-to-let mortgages are generally capped at 75% of a property’s valuation. The best rates go to landlords with a 40% deposit.

High street lenders are very active for standard buy-to-let mortgages, with specialist lenders picking up the baton for portfolios, HMOs, serviced accommodation and holiday lets. Arrangement fees and interest rates are usually higher than for residential mortgages, so it makes sense to work with an experienced independent broker to explore the market and get the right deal for you.

Whether you’re considering becoming a landlord for the first time, or you’d like to expand or diversify your portfolio, read on for our handy guide to the different areas of buy-to-let finance.

INDIVIDUAL BUY-TO-LETS

A standard buy-to-let mortgage is the most straightforward and least complicated way of getting into investment property, with the largest number of deals available.

Although lenders are primarily concerned with the monthly rent, they still perform all the usual credit checks, including how much money you owe elsewhere and your payment history.

For first-time landlords, lenders may require an additional level of personal income or financial stability, which can include substantial savings, pensions or other investments. As you gain experience and expand your portfolio, more and more lenders will accept your landlord income and history as enough security.

You can apply for a buy-to-let mortgage on your own or as a group, generally up to 3 more people. To get the best choice of deals, at least one person should be 21 or older, although there are buy-to-let mortgages available to 18-year-olds, and you can borrow well into your retirement. There are even a few lenders with no upper age limits.

Most buy-to-let mortgages are interest-only, which means the monthly repayments are less, and you’ll find fixed, variable and tracker deals. We can help you choose the best option for you.

The Financial Conduct Authority does not regulate commercial mortgages.

PORTFOLIO LENDING

As soon as you reach four buy-to-let properties, lenders will consider you a professional landlord and the world of portfolio lending will open.

A portfolio mortgage can simplify your finances with a single monthly repayment covering all your rental properties, rather than multiple payments on different days to several lenders.

Portfolio lending is available to individuals or registered companies and can cover any type of rental property. If you have a mix of holiday lets, buy-to-lets, HMOs and serviced accommodation in the UK, you can include them all.

You can even get a single portfolio mortgage covering multiple landlords. For example, if you solely owned three properties and your partner solely owned five, they could be grouped as a portfolio of eight.

Portfolio mortgages are stress-tested in much the same way as regular buy-to-let loans, but with a handy twist. Some lenders will accept lower-yielding properties if the majority of the portfolio is higher performing and takes the overall monthly income above 125% of the mortgage payment.

HMOs OR MULTI-LET

A house in multiple occupation (HMO) – also known as a multi-let – is a home where rooms are rented on individual contracts to 3 or more unrelated tenants with shared kitchen and bathroom facilities.

As rents have increased, HMOs have become a popular way of generating more income from a property by renting it to people who can’t yet afford an entire home of their own.

Although converting houses into HMOs has become more widespread, they’re still considered a niche market by lenders. The application process is more complex, with mortgages usually released through brokers rather than direct to landlords.

Lenders also tend to stress test on the projected rent from letting the property to a single household, and not the higher income of an HMO – partly because of the potential for void periods from increased tenant turnover, and also from the extra expenditure for landlords including higher interest rates and paying for utilities.

Lenders also prefer applications from landlords with at least two years’ experience, so if you’re a first-time landlord, you’re unlikely to be offered an HMO mortgage. Your best option is to start with a single buy-to-let and build your credibility.

SERVICED ACCOMMODATION & HOLIDAY LETS

Another way of increasing the income from a property is to rent it to tourists, business travellers or people in need of a short-term home.

A smart serviced apartment in a central business area, or a beautifully furnished holiday let in a prime tourist hotspot, can produce an income 3-4 times higher than the rent from an assured shorthold tenancy.

Unlike regular buy-to-let mortgages, serviced accommodation loans allow you to rent out a property on a short-term basis, generally up to 3 months at a time. Mortgages are still a specialist area, with most high street lenders not yet entirely confident or comfortable in this part of the market.

However, depending on the size of the project, some specialist lenders will finance the purchase price along with the costs for conversion, renovation, interior design and furniture.

The pandemic has shown how holiday lets and serviced accommodation are susceptible to events that don’t affect long-term rental homes. Meanwhile, legislation around holiday lets in cities like London and Dublin has limited how many days a home can be rented to tourists each year.

So while holiday lets and serviced accommodation can be hugely profitable, any investment property you buy should also have a market for assured shorthold tenancies in case you need a Plan B.

Final words

There are many different routes into buying a property as an investment, with literally hundreds of mortgage products from multiple lenders.

Finding the right deal for your goals is what we do all day, so why not get in touch on 0117 4039430 or hello@wrethical.com to talk about the best lending options for you.