Buy to Let Contractor Mortgages
Buy to let properties remain viable as a form of investment for UK contractors. That’s despite the Chancellor’s recent best efforts to raise more taxes from smaller investors.
Mr Osborne has rung the changes for landlords twice this year (2015):
- In July’s Emergency Budget, he announced a 4-year plan to restrict landlord’s tax relief;
- This will begin to take effect from April 2017;
- The proposed measures will affect higher-rate taxpayers with fewer than 15 buy-to-let properties. But worth noting: the figure of 15 properties is yet to be set in stone;
- In the Autumn Statement, he added 3% onto existing SDLT bands for private landlords;
- This will take effect from April 2016;
- For current Stamp Duty rates (not including the forthcoming hike), you can check out our FAQ.
So what does all this mean for contractors looking to invest?
Why should contractors invest in Buy-To-Let properties?
After more than a decade of working with contractors, we know they’re savvy with their cash. We also know that they enlist accountants to take care of their limited company earnings. So why take on the burden of an investment property?
At its most basic level, property investment is more stress-free than domestic mortgaging. But to get the most competitive mortgages, you have to do the groundwork first. That's where we come in.
Once you get those wheels in motion, the rental process should look after itself:
- lenders see BTL as a commercial loan, offering more relaxed lending criteria*;
- a mortgage broker can help you work out the figures to confirm if your plan is viable;
- more details on ‘the plan’, in our key components, below;
- if a contractor appoints a letting agent, the agent will take care of the day-to-day running.
* lending criteria is less strict compared to other contractor or self-employed mortgages.
Buy-To-Let remains a great way for the self-employed to shore up their retirement fund. Don’t overlook the monthly rental income, either. It’s as close to ‘money for nothing’ once the foundation’s in place as most of us will get.
Lenders have recently increased the rental calculation they use to calculate their loan offer. In the past, they only wanted rental income to exceed the mortgage interest repayments by 25%. Today, many lenders want rental income to exceed repayments by 35%.
Also, interest only is the typical repayment vehicle of Buy-to-Let mortgages. They’re not capital repayment products, like residential mortgages. For some lenders, seeking 35% rental yield offers greater long term security.
Rental income aside, it’s the capital appreciation over the long term that’s the bonus. Bricks and mortar can provide better yields than a contributory pension plan. Especially if the contractor has reached their lifetime allowance and need alternative investment sources.
Some brokers make BTL sound simple; believe so at your peril
Once you’ve moved in your tenants, great. You can sit back and watch your bank balance grow. But setting yourself up to be a buy-to-let landlord isn’t straightforward.
At the outset, there’s making time to find and buy the right type of property. We cover the key components to helping you reach those decisions below.
But it’s worth knowing that mortgage lenders can update their lending criteria, too. As we mention above, the calculations can change on a whim and on a lender-to-lender basis.
Any changes they make come into effect when working out your projected rental income. During that affordability assessment, you must ensure that you understand what’s asked of you.
It’s essential that contractors take advice before they embark on a Buy-to-Let project. A specialist contractor broker can display your worth in a true light.
For some contractors, their accounts will secure the investment property loan. But some potential investors will have less than two years’ trading history.
For the latter, the broker will use their contract rate to confirm their income.
And just as you plan to delegate the rental process, a broker can handle all dealings with the lender, too.
Key Factors for contractors to consider when buying an investment property
Many individual elements make up the concept of Buy-To-Let contractor mortgages:
- who are your potential tenants?
- what’s the most suitable location for them?
- will your mortgage facilitate affordable rent that provides the prerequisite yield?
- insurances to cover both the property, its contents and the tenants.
You’ll need to let the lender see the whole panorama to land your investment home.
From our experience, these are typical questions lenders ask of potential landlords. Or vice versa.
What’s the minimum deposit for a contractor buy-to-let mortgage?
Start with an easy one. Contractors need at least 25% of the home’s sale price to ‘put down’. So, if you agreed a buying price of £200,000, you’d need at least £50,000 deposit.
This may seem steep compared to residential contractor mortgage deposits. But you need a larger deposit in order for the rental calculation to work.
The bonus to putting more down? The greater the deposit, the lower the monthly repayments on the balance.
Is there a minimum repayment to rental income figure?
The more rent you can achieve, the greater your financial security. This is important, especially in light of the imminent changes we mention above. Buying homes to rent out is infectious: once you own one, you will want another.
But let’s not run before we can walk. For your first property, rental income must be at least 25% more than your mortgage interest repayment. Or, as a bank likes to express, the tenant must pay at least 125% of your repayment.
But as we mentioned above, some lenders are looking for a rental calculation of 135%.
As a quick example, let’s say your mortgage repayment is £800/pcm. You need to be in receipt of at least £1,000 rent to meet the lender’s rental yield criteria (at 125%). Or, if your lender is looking for 135%, you’d need £1,080 from your tenant.
Does location come into it?
Like all homes, your property’s surrounding environment is important. Tenants will pay more for a desired location.
The better connected, more suitable or more desired the location the better. Yes, you want to attract the right client. But the bank will also demand security for their investment, too.
The more up-and-coming an area, the greater the potential for long term capital appreciation. That’s on top of the greater yield whilst you own and rent the home.
But also, the opposite is true. The less desirable an environment, the more barriers a lender is likely to present. Their concerns may be:
- high-rise, multi-storey buildings;
- flats above commercial premises, e.g. kebab shops;
- premises above betting shops.
All these factors a lender will consider when deciding to make a mortgage offer. It’s not impossible to secure such properties. But if you’re prospecting in those areas, you will have fewer borrowing options.
What if my tenants move out?
This is where the ‘plain sailing’ that other brokers preach becomes just hot air.
Your tenant will sign a six- or twelve-month rental agreement. As much as you reserve the right to not extend the lease for any reason, they retain the right to leave.
Your bank won’t put your mortgage repayment on ice because you don’t have tenants.
It’s wise to save a percentage of your rental income in an ISA or other accessible savings account. Not only will it serve for when your home is empty, but as a fund for maintenance, too.
I know. You worked hard to save your 25% deposit at the outset. It may seem counterintuitive to keep on saving now. But do continue to set that money aside.
Yes, you want monthly income. But you also want your investment to mature when you retire, not face hefty refurb costs. You could live the playboy lifestyle on your newfound status. But being careless with your rental income may see you struggle to keep up future repayments.
What sort of people should I allow in my investment home?
Before committing to buy-to-let, be sure in your mind of the type of tenants you want to house. You may become aware of a property that’s come to market in a less desirous location. Don’t expect people who can afford sizeable rent to jump through hoops to move there.
Think of the location, the type of people who live in the area and what they may need:
- attracting pensioners? Near a bus route is good;
- commuting professionals? Be near a train station;
- enticing young couples? Be near a nursery or infant and junior school;
- looking to attract nurses and junior doctors? Near a hospital is the right diagnosis.
- and what about students? Universities offer a great catchment area and for prolonged periods.
Identifying the right target prospect is key to you sustaining your buy-to-let landlord status.
Yes, you need people in your home, but you also want them to stay there. If you have to find new tenants every six months, you’re creating more work for yourself.
Contractor & Freelancer Buy to let Mortgages
What represents the best buy to let mortgage for you depends on your circumstances. Yes, that may sound like a cop out; but it’s nonetheless true.
What we’ve learned is that no two contractors are the same. That’s either in their aspirations or the “snapshot in time” view of their career. Different mortgage structures will suit, depending upon those circumstances.
Some landlords prefer a competitive fixed rate buy-to-let mortgage. This gives them visibility to their future repayments, allowing them to budget. For others, a low variable or tracker rate is key as they want to maximise their rental yield.
Some landlords have been contracting for years and come to the table late in the day. This is often a way to top up their pension pot in a short space of time.
Others get in early and want to start as they mean to go on. They see buy-to-let as a long game, but know opportunity when it knocks their door.
In life, winners stack the odds in their favour
As you’re now aware, many variables can affect your status. That’s why you need a genuine flexible, whole-of-market mortgage broker who also understands contracting!
So what’s your next move? Above, we’ve listed to generic guide to buy-to-let mortgages. But you want a personalised quote that reflects your situation, right? Of course you do.
The only way we can confidently advise your next move is by you talking to one of our advisors. Like you, they’re independent professionals. They know what you’re going through from a business perspective. And it’s they who’ll undertake an initial, no obligation assessment for you.
How Buy to Let works for contractors; a recap:
We want to make sure that we’re right for you and vice versa. That said, here’s a concise overview of what you need to know and what you can expect from us; we:
- assess your mortgage affordability on your gross contract rate* and/or rental assessment;
- arrange buy-to-let mortgages for first time landlords and those who already own properties;
- offer low broker fees, with no hidden charges;
- can offer you a same day “Agreement in Principle”;
- promise a quick turnaround, often delivering BTL mortgage offers in a week;
- can access buy-to-let mortgages up to £1,000,000;
- are 100% independent, so can access the whole Buy-To-Let mortgage market on your behalf;
- keep you informed and updated on the progress of your application every step of the way.
*Use our contractor mortgage affordability calculator to see how much you could potentially borrow using your contract rate:
Contractor Mortgage Calculator
How much can I borrow on my daily rate?
Potential Borrowing = £
At Freelancer Financials, we have both buy-to-let and contractor-specialist advisors. They’re real people, who’ll guide you towards the right decision throughout the entire process.
Pop your contact details on our call back enquiry form or speak to one of our experts on 020 8421 7999. There’s no reason whatsoever you can’t become our next contractor buy-to-let landlord.