We’re thinking of buying to rent, while still renting ourselves
01-10-2015
Also, would we be able to get a residential mortgage as buy-to-rent mortgages are so much more expensive?
Reader would like to get a residential mortgage for a buy-to-let property. Photograph: Christopher Furlong/Getty Images
Virginia Wallis
Q I rent a place in London with my girlfriend. We are saving and although we would love to buy in London, we cannot afford the deposit for anywhere we would want to live despite our combined salary of around £110,000.
We could, however, afford a deposit in Manchester where are families are from. We were hoping to buy a place there to rent out while continuing to live and rent in London. This seems to make sense as we can afford a 10% deposit on a £200,000 property in an area we know and we could ensure the mortgage is covered by the rent.
As this would be our first (and only) property, is it possible to get a residential mortgage and then switch it to a buy-to-let? All the buy-to-let mortgages seem to be far more expensive so is there a way of getting a mortgage we can definitely afford? CB
A Yours in one of several emails I’ve received from people wanting to know if they should carry on renting in London while getting on the property ladder by buying a buy-to-let property in the affordable area they grew up in – including someone considering buy-to-let as a way of getting a better return on his cash than the 2% interest he earns on the £45,000 he has in an Isa.
However, you are alone in asking if you can use a residential mortgage to buy a property that you plan to let. And the answer is no, you can’t. Residential mortgages are for properties that the borrower will live in and call home. If you want to buy a property which you will rent out and never live in, you need a buy-to-let mortgage which could be tricky. Of the 61 buy-to-let lenders listed by Moneyfacts, only 19 are prepared to lend to first-time buyers. Whether they actually will or not – and on what terms – depends on a number of other factors.
Because first-time landlords who own no other property pose a greater risk to lenders, the size of deposit lenders require is higher than with residential mortgages. As a bare minimum you’ll need a deposit of 20% of the lender’s valuation of the property (available from only two of the lenders willing to lend to first-time buyers). But with nine lenders, the most you’ll be able to borrow is 75% of the value of a property, meaning a 25% deposit. The most six lenders will lend is 70% while with the two remaining, the limit is 65% or 60%.
Being a first-time buyer will also affect how your application for a mortgage is assessed. Normally, when considering applications from people who already own property, buy-to-let lenders look at just rental income which they expect to cover mortgage repayments by at least 125%. With first-time buyers, however, lenders tend to apply the more stringent affordability checks which are applied to people wanting a residential mortgage so your earnings and expenditure will be looked at alongside the potential rental revenue.
Finally, you are right that buy-to-let mortgage deals tend to be more expensive than those offered to homeowners. You are also likely to find that the best deals are reserved for experienced landlords who pose less of a risk than first-time buyers.
The cost of running a buy-to-let business doesn’t stop with the mortgage interest. You’ll also have to pay for insurance, gas and electricity safety checks, legal advice setting up any tenancy agreement, maintenance costs, commission if you choose to use a letting agent to find and deal with tenants and income tax on the net rent (after deducting allowable expenses such as those just listed together with mortgage interest). When you sell, you’ll also need to pay capital gains tax (CGT) on any gain you have made.
The answer to the reader with the Isa is that it’s very probable that investing in a buy-to-let could give you a better return on your money than the 2% interest you are currently earning. But to know for sure you need to work it out: take your annual rent, subtract the annual mortgage cost together with other expenses. You then divide this figure by the amount you spent on buying the property (including the cash deposit, stamp duty land tax, legal fees and so on) then multiply this by 100 to get the percentage rate of return before tax.
Muddled about mortgages? Concerned about conveyancing? Email your homebuying and borrowing worries to Virginia Wallis at virginia.wallis.freelance@theguardian.com