Changing a mortgage to Buy To Let

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Can I switch to a Buy to Let?

Our MD Daniel Condren talks about changing a residential mortgage to a Buy to Let. Listen below

Can I switch my residential mortgage to a buy to let?

Yes, you can. A lot of customers don’t understand the difference between their own residential mortgage and a Buy to Let. But it’s fairly common to switch a mortgage over.

You can simply go to your current lender and ask for a mortgage change to allow you to rent out the house. It’s a common approach when moving in with a partner, to continue to pay the mortgage off.

But, unfortunately, by doing that you’re still paying the same monthly payment. There are ways to change that and different options to consider.

How does it work, what’s the process?

The best thing to do is speak to a broker when it comes to changes in your circumstances.

If you’ve currently got a house, you’re not living there any more and you want to change it to a Buy to Let then speak to the experts.

We’ll explain the options in changing your mortgage, the costs involved, and whether you have enough equity.

The quickest process is to approach your current lender and ask for Consent to Let. This is different to Buy to Let, but is the easiest and most common approach. The alternative is to take out a Buy to Let mortgage with a new lender.

Is it easy to change to a Buy to Let mortgage?

The process is easy once you have considered the options and are sure that you have identified the most suitable approach. Any broker should be able to help as long as you meet the criteria – and if you’ve had a property a while then you should.

However, if you’ve just started out and you don’t have much equity in the house it could be more challenging. Most Buy to Let lenders will only lend up to 75% of the value of a home, so if you’ve only bought it with a five or ten percent deposit you might not have enough equity yet.
But if you’ve had the house for a long time and have reduced the mortgage with regular repayments, you should be able to move to Buy to Let. 

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What happens if you don’t change your mortgage to a Buy to Let?

If you gain Consent to Let from your lender, you may be overpaying on that mortgage – which is a good thing. Most residential mortgages are ‘repayment mortgages’ which means that the debt is slowly coming down.

On a Buy to Let mortgage, lenders are not too concerned about how you’re going to repay the debt. The property is seen as an investment to generate rental income. Because of that, most Buy to Let mortgages are done on an interest only basis.

If your strategy as a landlord is to pay off your home rather than maximise the monthly income, you can stay on a repayment plan. You might not love it right now because the payments are a lot higher. But you’ll certainly like it in 20 years when the mortgage is paid off and you’ve purely got rental income coming in.

Do think about having two repayment mortgages, however. Hopefully your tenant will pay the mortgage for you, but you may also have a new mortgage to pay as well. If your tenant doesn’t pay, you have a void period or something goes wrong, you will suddenly have two mortgages on a repayment plan – which could be quite expensive.

A broker will be able to talk this through with you. We will check you’re on the most suitable type of mortgage and explain the advantages of Buy to Let and Consent to Let.

Is Buy to Let more expensive?

Typically, yes, it is more expensive because there’s more risk for the lenders. Traditionally, Buy to Let mortgages are always more expensive than normal residential rates – but the rules are more relaxed when it comes to affordability.

I often show customers the difference in putting a Buy to Let mortgage on an interest-only basis. As an example, somebody with a £200,000 thousand pound mortgage over a 25 year period might expect their monthly payment to be £700 to 800 pounds per month.

If we just moved that to a Buy to Let on interest only, and you had enough equity, the monthly payment would reduce by around £500 pounds a month. In addition, you might have a tenant paying £700 pounds in rent.

This can make good sense mathematically, but you should also think about repaying the debt. You’re not on a repayment plan, so you’re not repaying the debt. So a smart landlord will bank the rental income and as it builds, use it to pay off the mortgage manually.

Most lenders allow you to overpay and if you want to own the property at the end of the mortgage, you will need to repay the debt.

But it all depends on the customer – if they like having that extra income every single month their strategy might not be to repay the debt. A mortgage advisor would talk to them about the future plan.

What is Consent to Let?

When you get your first mortgage you buy a property on the basis that you will live there. You’ve been assessed on your income and everything’s gone through. Consent to Let is where you go back to that lender and seek permission to let the property. Most lenders are fine with that. You will often be given a six month or a 12 month option in line with your circumstances changing.

Consent to Let is usually a temporary measure until your deal ends. At this point, when your deal ends, you’ll be placed on a higher standard variable rate with the lender and it’s always advisable not to sit on that rate. Speak to a broker to understand your options.

It’s fine to stay on a Consent to Let, but speak to an expert to be better informed about whether it makes financial sense.

The average standard variable rate is about 3.15 to 4 percent. If you’ve got the equity, a Buy to Let might start at 2 percent. So you can see that it’s well worth reviewing your situation by speaking to an expert.

How quickly can you get Consent to Let?

Always speak to a broker first. But if you do decide to go for Consent to Let the lender typically honours that. Again, it differs from lender to lender, depending what their policy is, but they understand that a customer’s circumstances can change so it can be done very very quickly – within 48 hours or so.  

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How soon can you remortgage to a Buy to Let?

You can remortgage typically from day one – there are lenders that would accept this, but generally you will have more options after six months. There are consequences to any type of remortgage, so you must check your deal before you make a decision.

Most residential customers are on a fixed rate mortgage – and once you’ve agreed your deal with a lender, any change or remortgage will incur fees if you move away from that lender during your fixed period. There will almost certainly be an early repayment charge.

That’s why a lot of customers decide to seek Consent to Let while they’re in that period. Then at the end, come to a broker and we will help you find a suitable Buy to Let investment mortgage. Again, a broker can explain all this to you and tell you how much the early repayment charge would cost.

How much deposit do you need for a Buy to Let?

Deposits are a little bit bigger for a Buy to Let. With residential mortgages you’re looking at a minimum of five percent deposit in the current climate. Ten percent is ideal and then the bigger the deposit the better rates you might get.

But in a Buy to Let world, you need an equity stake or a deposit of more than 20% – ideally 25% or more. So, if you’ve got a good amount of equity and you’ve had the house a while you should be able to switch over.

If you’re struggling with the numbers and can’t quite figure out whether you’ve got enough equity, again, contact a broker. We do this day in, day out so we understand how much your house is worth.

How much can I borrow with a Buy to Let mortgage?

The borrowing amount does differ from lender to lender. Each has an affordability assessment or a ‘stress test’ based on a number of factors.

On a residential mortgage this is all about your income and your commitments. On a commercial Buy to Let mortgage this is done very differently. Instead the rental income is very important.

Your broker will ask you how much you plan to let the property out for, as this is the basis of how much you could borrow, as well as how much equity you’ve got in the property.

Speak to local letting agents or your broker to understand rental prices in the area you’re in.

Will I pay Stamp Duty on a Buy to Let?

When you’ve bought a house that changes from a residence to a Buy to Let, you may have bought it with a stamp duty exemption, as it is calculated differently on a residential property.

Once your property becomes an investment, there are different taxations to consider. The date you bought the house and the date it changes to Buy to Let is very important.

Seek out tax advice from an accountant or somebody who specialises in property taxation as there are certain things to consider, including Capital Gains Tax. When you change your residential property to an investment, you need to understand that when you sell that asset eventually or when you pass away it may be subject to tax.

Meanwhile, Stamp Duty is only paid when you acquire the property – when you first buy it. Buying a property to let is subject to a higher rate of Stamp Duty than a residential home, but you only pay this tax once when you buy the home.

Is it illegal to rent a house on a residential mortgage?

It isn’t illegal from a criminal standpoint, but it is a breach of the contract you have with your lender. You are obliged to tell them that you are letting your property out – if not you can be in a lot of trouble.

Contractually, the lender would be within their rights to retract the lending and potentially request the money back.

My advice is to always be honest. Be transparent and tell the lender what your intentions are, what your plans are. A broker would be able to tell you whether it’s allowable.

Are there any other costs involved?

There’s no cost to a Consent to Let and going back to your existing lender. Most brokers will charge a fee for their professional advice and knowledge – some charge this upfront while others seek payment at the end of the process.

A broker has to tell you what their fees and terms of business are before they give you any advice. Generally the broker will spend time understanding what you’re trying to do in an initial meeting, and this consultation is usually free.

It’s our job to point out the advantages, if something is going to make you money or save you money, and explore all the options so that you can make an informed decision.

If in doubt, pick up the phone. A lot of people out there have just put a tenant in their property without exploring the savings that they could have made. Just take half an hour of your time to understand if your mortgage can be reduced with better interest rates. Many people get a tenant, their interest rate is four percent and the rent’s covering that – they think it’s great. But what they don’t realise is they could be on a two percent interest rate and generating extra income straight into their pocket.  

Your home may be repossessed if you do not keep up repayments on your mortgage

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