So you want to swap your residential mortgage for a buy to let?
Renting out your own home is an option that many people turn to when their personal circumstances change. It allows an extra income to be generated and by keeping the property you still benefit from future rises in property prices.
But changing how you use a property also means updating your mortgage, so that they both match. In this article we look at the related mortgage options, eligibility criteria and how to get the best deal by using a broker.
Can you change a residential mortgage to a buy to let?
This situation is more common that you might think.
It is definitely possible to change your current standard mortgage over to a buy to let.
This allows you to retain the property as an investment and let it out for an additional income.
The reasons why people do this are varied and could include:
- You are buying a new house
- You are moving abroad
- You are moving in with a partner
Do you have to stay with the same lender?
No, you do not have to stay with your mortgage company.
But it does make sense to talk to them first to see how they might be able to help you.
If this doesn’t work out then you can look at remortgaging over to a new lender.
Either way, it’s a good idea to get a broker to check your options for staying or remortgaging, otherwise you could end up overpaying.
You have three options
Consent to Let
Consent to let is where you obtain formal permission from your lender, allowing you to let your home.
It’s a temporary arrangement, usually lasting for 6-12 months. This can be a good option if you intend to move back to the property at some point.
Your lender may charge you an admin fee for the permission, they may also increase your interest rate.
They may also decline your request if your payment record is not satisfactory.
Change your mortgage type
This would be a change of mortgage but with the same lender.
It’s an internal switch so it shouldn’t take too long to setup and there’s likely to be some fees to pay. Unlike consent to let, this is a permanent change to a different type of mortgage, usually a buy to let.
Change your lender
This would involve remortgaging to a new lender and changing the type of mortgage you have at the same time.
You would apply for a buy to let remortgage to achieve this. Depending on the financials etc, you may be able to borrow some more money at the same time.
Again, this is a permanent change over to a buy to let mortgage. As this option involves paying off the current mortgage, it’s really important to check if there are any early repayment charges.
Let to buy – How does it work
Sometimes there is a need to let out your current home and buy a different property at the same time.
This is known as a “let to buy” arrangement.
You would really need an experienced mortgage broker to arrange and coordinate this, as it involves quite a lot of work. Not all lenders accept a let to buy situation.
You will need to apply for two new mortgages:
- Let: A buy to let remortgage is needed to convert your existing mortgage, allowing you to rent the property out. Most people need to use this remortgage to release some capital which can then be used as a cash deposit on the property to be purchased.
- Buy: A standard residential mortgage will be needed to finance your new home. This lender needs to be happy with the other property being let out, and mortgaged, as it affects your affordability.
The switching process explained
Here is what needs to happen if you choose to remortgage to a new lender.
Understand any ERCs
Remortgaging to a new lender means that you will be cancelling your current mortgage. If you are still in a deal then there could be ERC fees to pay, and this can be expensive.
Ask your lender for a redemption statement, which will show all the fees you need to pay.
Get a rental assessment
A rental assessment will let you know how much rent you could get each month by letting to tenants. It’s a good idea to ask a couple of local letting agents to see what the average is.
The lender will need this figure and it forms part of the mortgage application.
Speak to a broker
Speak to an experienced buy to let mortgage broker at the earliest opportunity. They will have the knowledge and experience to find you the best deal.
The advisers we work with can easily check to see what buy to let rates you qualify for, and interest-only options are available from most lenders.
If you need to borrow some more money then they can advise on what is achievable and how it affects the monthly cost.
Make your application
Once you have decided to apply for a mortgage it’s time to collate all of your documents, proof of income etc and send this to the lender. If you are using a broker (hopefully you are!) they will work with you to ensure everything looks OK.
Upon receipt the lender will go through the credit checking process and will make sure your case fits their lending criteria. Then its time to value your property. This could be done by a surveyor visiting but often for a remortgage it is just a virtual desktop valuation.
When the lender is happy they will issue a mortgage offer which details how much they will lend and on what basis. From there it moves on to completion. This is handled by your solicitor and the new mortgage is used to pay off the old mortgage.
What type of buy to let do you need?
One aspect to establish early on is what type of buy to let mortgage do you need?
No this is not a trick question!
Different mortgage types have different purposes, and this includes the style of letting.
Here are a few examples:
Buy to let: You are letting the whole property so that tenants can live there permanently, using it as their main residence.
Holiday let: You let the property to different guests during the year, for short term durations of up to 30 days.
When would you need a holiday rental mortgage?
Serviced accommodation: Serviced accommodations are always fully furnished residential properties which are let out on a short term basis.
Eligibility criteria
Each lender will have their own requirements but here’s some general guidance:
Loan to value (LTV)
All lenders (and brokers) will refer to LTV percentages. It is a percentage number that tells them how much of your property value is taken up by debt. You can use our LTV calculator to work yours out.
The typical maximum LTV for a buy to let is 75%. So you need to have 25% as equity to qualify.
Rental income
Affordability is based on the amount of monthly gross rent from an AST letting. Most lenders will want this figure to be 125-145% of the interest only monthly cost.
Property type
A surveyor will assess the viability of renting the property, this will include the estimated rent and the type of property, including its construction. If a property is classed as non-standard construction then you need to consult with a specialist broker, as it vastly reduces the number of lenders.
How long you have owned the property
Six months is the magic figure!
You will struggle to get a remortgage where you have owned the property for less than six months, courtesy of the “six month rule” that some lenders adhere to. A specialist broker could help you to find a day one remortgage as a solution.
Credit history
You credit history will be important. Having a high credit score and a clean credit report will give you access to more deals. Solutions are available even if you have picked up some bad credit.
Minimum income
This doesn’t determine how much you can borrow, this is influenced by the rent, but a minimum income of £25-£30,000pa is usually needed.
How a broker can help
This is a good example of a situation where a broker can really add value, particularly if you need a let to buy arrangement.
There are lots of buy to let lenders that don’t advertise and don’t want to deal direct with borrowers.
So they only allow brokers to sell their mortgages.
These along with other ‘broker only’ deals won’t be available to you if you try to search for your own buy to let mortgage.
An independent mortgage broker can find the best mortgage for you from over 100 different lenders.
They will also provide advice on how best to set your mortgage up, and any changes that may need to be made to your personal situation.
Once you are ready to apply they can help collate the paperwork and keep up to date with the lender, making sure everything is as it should be.
Buy to let mortgages normally require a 25% deposit. This is 25% of the property purchase price, or value.
With a remortgage the 25% will come from your equity already in the property, rather than cash.
Yes, it is possible to go from a BTL mortgage to a standard residential mortgage.
You would apply for this if you returned to live in the property in the future. The process is much the same.
It’s not illegal in terms of UK law.
But it is a breach of your mortgage contract with the lender. This is legal contract which has consequences.
You don’t always need your own solicitor when you remortgage a property. Often the lender will allow you to use their panel conveyancer. There’s still going to be a cost but it should be reduced.
You could do that, but we would not recommend it.
This would be a breach of your mortgage contract, as residential mortgages do not allow the whole property to be rented (without permission).
Yes this will be fine.
If you’ve inherited a property or plan to rent out your previous home rather than selling it, then a consumer buy-to-let mortgage might be for you.
These mortgages fall under the umbrella of regulated buy-to-let products and are overseen by the Financial Conduct Authority (FCA), offering borrowers similar protections to residential mortgages.
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